On August 31, 2018, Representative Kirk Schuring introduced Ohio House Bill 727, which would authorize an income tax credit for investing in an Ohio Opportunity Zone. This appears to be the first state effort to pair the new Tax Cuts and Jobs Act Qualified Opportunity Funds with state tax credits. If approved, this new tax credit could help attract investment in Opportunity Zones by enabling investors to realize more expeditious returns on investment, as the credit would be applied in the year funds are invested in a Qualified Opportunity Fund.
The legislation proposes a 10 percent tax credit for investors who invest at least $250,000 in an Ohio Opportunity Zone. At present, neither the amount of investment nor the available tax credit would be capped. The proposed tax credit would be non-refundable; therefore, interested investors should consult with their tax advisors to maximize the benefit from the credit, should it be approved. In addition, the proposed legislation would not limit the invested funds to capital gains, and it would allow pass-through treatment of the credit if the investment is made by a pass-through entity.
Investors in Qualified Opportunity Zones created under the Tax Cuts and Jobs Act may defer tax on capital gains until the earlier of the date on which the investment is sold or exchanged or December 31, 2026, as long as the gain is reinvested in a Qualified Opportunity Fund, which is a vehicle organized to invest in Qualified Opportunity Zones. Deferred capital gains receive a step-up in basis if held for at least five years, reducing the capital gains tax due. If the investor holds the investment in the Qualified Opportunity Fund for at least 10 years, he or she would be eligible for an increase in basis equal to the fair market value of the investment on the date the investment is sold or exchanged, resulting in no further taxation upon disposition. These are generally viewed as longer-term returns on investments. The potential to see an immediate tax credit, as proposed in the House Bill 727 legislation, may make Opportunity Zones in Ohio more lucrative if it is approved.