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The Wizard of OZs: What you should know about opportunity zones.

Financial Planning Dentist

What is a Qualified Opportunity Zone Property?

The 2017 Tax Cuts and Jobs Act created special tax incentives for those willing to risk their own capital to improve and develop the real estate in traditionally underinvested sections of the country called opportunity zones. The goal was to raise long term capital by incentivizing investors that historically wouldn’t invest in these types of opportunities due to the inherent risk. They’re designed with the purpose to benefit the denizens of those locations and investors looking for sizable tax incentives to commit capital. The Qualified Opportunity Zone program is the solution that provides that tax incentive for private, long-term investment in economically distressed communities.

What makes it a Qualified Opportunity Zone (QOZ)?

The definition for this type of zone is “economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.” The process for designation of the OZ is pretty straight forward. All 50 states are allowed to submit a list of blocks of low-income tracts across their state based on census data. The Treasury then approves their inclusion in the program or not (most were approved). Plans are now in place with municipal and state governments to commit to projects that bring new construction projects into these areas.

What are some unique risks you should be familiar with before you invest in an OZ?

  1. Market Liquidity – the markets for these investments are immature. There is a sizable pool of available capital for investment, but most of it is from long view institutional investors. The long term, committed and disciplined capital on the ask side, and the insurability for most investors in this space supplying the bid likely means that the spreads widen and limit overall liquidity for investors.
  2. Vehicle Liquidity – The types of vehicles offering exposure to this space are limited, largely non traded REITs. These agreements have a very long view of the investments and capital and few offer the liquidation windows and frequency temperamental investors might be used to. Asking yourself what kind of liquidity and income requirements do you have in your investment plan is more important than ever. Investors seeking income starting day 1 may need to find investments that reflect that and will see their upside limited as a result. Those seeking to “time the market” through this development will be frustrated by the duration of these investments. 
  3. Investment Risk – investment in “economically-distressed communities” carries a very unique risk that the investment will not perform on par with other parts of a city or market. Their unique performance risk with these investments will never go away, simply put you are buying into a major turnaround story in some parts of the country that may never come. This is mitigated by a few factors, the managers selecting and overseeing the projects are more important than ever. Picking the right project, with the right builder, in the right neighborhood is more important than ever. 
  4. Intent – why are you committing capital to these projects? Is it only for income? Are there parts of the country that have an emotional connection to their success? Is this a good attribute or a negative? I think it’s important to have a real honest sense of purpose in these investments. Not only to help understand and mitigate the risks involved but to help you price in the purpose of this investment. More and more people want to know that the dollars they are investing are being used for societal benefit, but make sure you are handicapping that expectation appropriately.
  5. Tax – The tax benefit for OZ’s has a pretty long ark, and the year over year benefit changes over time. Before you enjoy the tax benefits afforded here you should confirm a couple of assumptions. First, that your tax liability is ample enough to enjoy the full benefit, second, that your tax strategy for the next decade marries well with the long term requirement of this investment and third, there are no alternative strategies for a similar tax benefit with less inherent risk. Confirming these three elements of taxation and its accompanying strategy is an essential step for your CFP and CPA before you should consider the upside of this program. 
  6. Statutory Risk – the Tax Cuts and Jobs Act (TCJA) is current law, and planning for current law is not the issue. Tracking and making sure this new tax strategy stays intact going forward should be on an investor’s mind and having a plan of action if and when conditions change is part of the monitoring process for both your entire plan and this specific investment. Laws change and this opportunity is set to expire 12/31/2026. 
  7. Regulatory Risk – as I said before, the inclusion of a region in an opportunity zone is pretty straight forward, but the regulatory requirement for maintaining that acceptance by the U.S. Treasury is still important. Making sure that the project, builder, and fund all stays focused on the regulations that keep it inside the tax purview is eminently important. Selecting a manager that is versed in the regulations and will do the property due diligence to stay in the lane is important. The risk is the loss of the tax benefits you have likely priced into your expectations. 

Opportunity Zones have the ability to be truly transformative for communities and investors. A fantastic marriage of social benefit, long term capital investment, and tax benefit make for an appealing place to see a reasonable return. But taking advantage of this program for non-institutional investors is going to have a few parties you should consult to confirm the investment is right for you:

  • a CFP to confirm that this investment works in your personal financial plan
  • a CPA that understands the full tax benefits of this investment
  • an estate plan that can accommodate the long duration of this type of an investment
  • an investment manager that understands and mitigates the risks as best as possible
  • an investment advisor that helps you understand vet the vehicles and nuance in the opportunity set

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Kevin Taylor

Dear Next American President: Preserve Section 199A Deduction of The Tax Cuts and Jobs Act (TCJA)

The Tax Cuts and Jobs Act of 2017 represented a significant shift in the landscape of American economic policy, particularly affecting small businesses and self-employed individuals who form the backbone of the economy. Among its many changes, Section 199A stands out as a pivotal element of the legislation, offering a substantial deduction of up to 20% on qualified business income for eligible business owners. This crucial provision not only eases the tax burden for these vital contributors to the national economy but also influences their financial strategies and growth plans, touching every facet of their business operations. As the political climate continues to ebb and flow with discussions of amendments and overhauls, the relevance and necessity of the 199A deduction remain topics of critical importance. Preserving this deduction is not just about maintaining a tax break; it’s about fostering an environment where small businesses and entrepreneurs can thrive. In this article, we will explore the integral role that this deduction plays in promoting a healthy, dynamic, and equitable economic landscape. Stimulating Small Business Growth Small businesses are the undeniable powerhouse behind the U.S. economy, playing a critical role in driving employment, innovation, and community development. According to the U.S. Small Business Administration, small enterprises are responsible for creating two-thirds of new jobs annually and account for 44% of U.S. economic activity. This impact is not just in numbers; small businesses contribute uniquely to the innovation landscape, often pioneering technologies and services that reshape the market. The vibrancy they bring to local economies is vital, helping to revitalize communities and stimulate economic development at a grassroots level. Recognizing the pivotal role of these enterprises, the Section 199A deduction under the Tax Cuts and Jobs Act of 2017 was designed as a strategic tool to lessen their tax burden. By allowing eligible business owners to deduct up to 20% of their qualified business income, this policy enables small businesses to retain a greater share of their earnings. This retention of capital is crucial for small businesses, providing them with the financial flexibility needed to expand, hire additional staff, raise wages, and improve their products and services. Such investments have a multiplier effect, not only on the businesses themselves but also on the economy at large, enhancing the overall service and product offerings available to consumers. However, the future of this deduction is under scrutiny, with ongoing debates about its potential curtailment or elimination. Should such changes occur, the additional financial strain imposed on small businesses could significantly dampen their ability to contribute to economic diversity and job creation. The National Federation of Independent Business has highlighted that changes to this deduction could reverse the gains made since its introduction, potentially stifling the entrepreneurial spirit that is crucial for continued economic growth and innovation. Maintaining this deduction is therefore not just a matter of tax policy but a fundamental component of fostering a robust and dynamic economic environment where small businesses can thrive and continue to drive the U.S. economy forward. Enhancing Competitiveness Small businesses face a myriad of challenges in today’s economy, especially when pitted against larger corporations with more substantial resources and sophisticated tax strategies. One crucial measure that has sought to mitigate these challenges is Section 199A of the Tax Cuts and Jobs Act. This provision grants small businesses the ability to deduct up to 20% of their qualified business income, significantly reducing their tax burden. Such measures are not merely fiscal benefits but are strategic tools designed to level the playing field, offering small businesses a viable chance to compete and succeed alongside their larger counterparts. The importance of fostering a competitive environment cannot be overstated. A healthy business ecosystem, marked by robust competition, drives innovation, enhances product quality, and keeps prices in check, ultimately benefiting consumers. Section 199A plays a vital role in this process by enabling small businesses to reinvest their tax savings back into their operations—funding research and development, expanding service offerings, and improving product quality. This ongoing reinvestment not only supports the businesses themselves but also promotes a diverse market landscape where innovation can flourish. However, the potential reduction or elimination of this deduction poses a significant threat to the competitive balance within the market. Without the financial relief provided by Section 199A, small businesses may struggle to maintain their market share against larger corporations, which could lead to a reduction in market diversity and consumer choices. According to a study by the Brookings Institution, the absence of such tax incentives could lead to increased market consolidation, thereby stifling competition and innovation. Preserving Section 199A is therefore critical, not just for the survival of small businesses but for the preservation of a dynamic and competitive marketplace that fosters continual growth and innovation. Encouraging Innovation Innovation serves as the driving force behind economic and technological progress, and small businesses are often at the forefront of this movement. Due to their size and structure, small enterprises possess an inherent agility that allows them to swiftly adapt to new technologies and shifting consumer demands—capabilities that their larger counterparts typically cannot match with the same speed. This responsiveness is crucial in today’s fast-paced market environments where being first can mean the difference between leading the market and lagging behind. The introduction of the Section 199A deduction by the Tax Cuts and Jobs Act has been a significant boon for these nimble entities, providing them with much-needed financial relief. This tax relief allows small businesses to channel more of their resources into research and development without the overarching pressure to deliver immediate financial returns. This kind of investment is vital for fostering an innovative environment where creative ideas and technologies can be tested and developed, ultimately leading to industry advancements and enhancements in product offerings and services that enrich the consumer experience. Preserving the 199A deduction is therefore critical not just for the health of small businesses but for the broader landscape of industry and innovation. According to research from the National Bureau of Economic Research, small businesses contribute

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May 9, 2024 No Comments
Boulder Financial Planning Experts
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Kevin Taylor

How to draft an Investment Policy Statement?

Define the investment objectives: The first step in drafting an IPS is to define the investment objectives. This involves assessing the risk tolerance of the trust or family office and determining the desired return. Establish the asset allocation: Once the investment objectives are defined, the asset allocation strategy can be established. This involves determining the proportion of assets allocated to each asset class based on the investment objectives and risk tolerance. Develop the risk management strategy: The risk management strategy should be developed based on the investment objectives and the risk tolerance of the trust or family office. The strategy should define how risks will be managed, monitored, and evaluated. Establish the roles and responsibilities: The IPS should establish the roles and responsibilities of the investors, fiduciaries, and investment managers. It should define who is responsible for making investment decisions, monitoring the portfolio, and evaluating performance. Evaluate performance: The IPS should include a performance evaluation process that assesses the performance of the investment portfolio relative to the investment objectives. The evaluation should be conducted regularly and used to make adjustments to the investment strategy.

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February 2, 2021 No Comments
Articles
Kevin Taylor

Do your chores or there will be NO MONEY in your retirement account!!!! ~ DAD

First off, review this list of answers and accept how incredible this idea is, to both fund college, make your kids earn it, and do it all in a tax-advantaged way: Yes, income earned in the home can be put into a child’s Roth (within the rules) Yes, the income and savings can be used for college, or really any major life purchase Yes, it is a relatively easy strategy if you follow the below tips If you are raising your kids like I am mine, the early years are an important time to ingrain a set of good money habits that hopefully they keep for the rest of their lives. I require my kids to put 10% of any money they earn into the following categories, college, giving, and taxes (back to the family). Meaning they only ever get to spend about 70% of their income. This has been met with several comments ranging from “awesome” to “cruel”. But for my kids, it’s all they know. They don’t negotiate or object to taxes because it has always been how they get paid. I hand them a dollar and take a dime back instantly. It’s visceral, and habitual at this point.  I feel money is a difficult idea if children are never given the opportunity to handle it, hold it, and lose it. When it comes to teaching financial lessons, setting a good parental example is important, but actually giving the child some experience making wise financial decisions is essential. This includes both giving the child decision-making authority with their own money and giving the child the means to earn money outside of or instead of an allowance. This is where the Roth comes into play, and your opportunity to hire your child… This is an open platform to pay your children in a way that makes sense for your family. And the best part is that this payment can be counted as earned income and thus qualifying for Roth eligibility. But there are some rules you need to follow and this article will walk parents through the right way to keep the Roth eligibility intact.  You will want to make it clear, under which IRS designation you want to use. The two options are as a self-employed independent contractor or a household employee of yourselves.  This all might sound silly, hiring your child as a contractor, but the benefits make it worth it. I promise. And like taxing your children, it might only sound silly because it’s new, but your kids won’t know this isn’t normal and will just roll with it. The Independent Contractor Route… If you decide that your child is an independent contractor, then all of the child’s earnings must be reported as Self-Employed on Schedule C.  So it should be noted that if their net earnings from this kind of self-employment are more than $400, the child would need to pay self-employment tax (Medicare and Social Security) on Schedule SE. That’s an important threshold to be aware of.  Quite possibly the best part of choosing the independent contractor route is that your child could work for many different families. So if they are routinely engaging in neighborhood childcare, lawn maintenance, or other jobs in your community, this might be the most open path.  Let’s be clear though, this route still requires that the child follow the child labor laws. But these laws are reasonable restrictions for most circumstances.  The first law of note is the age restrictions on certain occupations. If your child is under 14, then the list of potential occupations is limited to: delivering newspapers to customers; babysitting on a casual basis; work as an actor or performer in movies, TV, radio, or theater; work as a homeworker gathering evergreens and making evergreen wreaths; and work for a business owned entirely by your parents as long as it is not in mining, manufacturing, or any of the 17 hazardous occupations. This is the sweet spot for any family that has 1or more family businesses.  At age 14 and above the universe of employment can expand to include: intellectual or creative work such as computer programming, teaching, tutoring, singing, acting, or playing an instrument; retail occupations; errands or delivery work by foot, bicycle, and public transportation; clean-up and yard work which does not include using power-driven mowers, cutters, trimmers, edgers, or similar equipment; work in connection with cars and trucks such as dispensing gasoline or oil and washing or hand polishing; some kitchen and food service work including reheating food, washing dishes, cleaning equipment, and limited cooking; cleaning vegetables and fruits, wrapping sealing, and labeling, weighing pricing, and stocking of items when performed in areas separate from a freezer or meat cooler; loading or unloading objects for use at a worksite including rakes, hand-held clippers, and shovels; 14- and 15-year-olds who meet certain requirements can perform limited tasks in sawmills and woodshops; and 15-year-olds who meet certain requirements can perform lifeguard duties at traditional swimming pools and water amusement parks. At age 16 or 17, almost any job that is not expressly prohibited (like alcohol serves or licensed operations) becomes available to children.  For more details on the standing labor laws and how they pertain to children consult YouthRules.Gov. The Household Employee Route… This is likely the more common route, and requires less diligence in what the job is, and the laws that protect it. There are two general guidelines you still note before you take this route:  Your list of jobs allowed under child labor laws expands significantly as you are allowed to “work for a business owned entirely by your parents as long as it is not in mining, manufacturing, or any of the 17 hazardous occupations” at any age. The wages are exempt from FICA taxes if they are working for a business owned solely by their parent(s). When determining if this employment is suitable this is the question you need to ask yourself: Does the employer (you) have control

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June 15, 2021 No Comments

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