A Pre-Existing Business refers to a business that was already in operation before the designation of an area as a Qualified Opportunity Zone (QOZ).
The QOF program was established by the Tax Cuts and Jobs Act of 2017. It’s designed to incentivize long-term investments in low-income urban and rural areas across the U.S., which are designated as QOZs. To get the associated tax benefits, investors can invest their capital gains in a QOF, which then invests in eligible property or businesses within a QOZ.
The rules around what constitutes a qualified business for QOF investments can be complex. Generally, for a business to qualify for QOF investment:
- It must conduct most of its business within a QOZ.
- It must either be a new business or a substantially improved existing business. Simply purchasing a “Pre-Existing Business” without making substantial improvements to it may not qualify.
- There are certain types of businesses that are expressly excluded from qualifying, such as golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetracks or other facilities used for gambling, and stores where the principal business is the sale of alcoholic beverages for consumption off-premises.
Given the detailed requirements and regulations, it’s essential for investors and business owners to seek legal and tax advice before making any investment decisions related to QOFs and QOZs.