During our webinars we received many great questions covering a wide range of important topics. To help further your understanding of this exciting new program, our General Counsel, Kelly Alton, a nationally recognized tax attorney who previously worked at the IRS Office of Chief Counsel at the National Office in Washington, DC, has partnered with our co-presenter, Novogradac & Company, to provide responses.
This is the second installment of our Opportunity Zones Q&A blog series. You may read the first installment here: Opportunity Zones Q&A: Previously Held Property
Q: Can a limited liability company (an “LLC”) qualify as a Qualified Opportunity Fund?
A: Under the Internal Revenue Code, LLCs are not provided with a unique tax regime like partnerships and corporations have. By definition, LLCs can be classified in three different categories in terms of how they are recognized, and taxed, under federal tax law: a disregarded entity, a partnership, or a corporation.
Single-member (owner) LLCs, by default, are taxed as disregarded entities, unless they file an election to be taxed as a corporation. This means that there is no entity recognized for federal income tax purposes and the IRS will always look at the owner of the LLC as the taxpayer and also owner of the assets of the LLC. This is true even if the LLC obtains its own taxpayer identification number.
LLCs with multiple members, by default, are taxed as partnerships, unless they file an election to be treated as a corporation.
To qualify as a Qualified Opportunity Fund, the LLC must be taxed as either a partnership or a corporation. LLCs that are intended to qualify as OZ funds will be treated under the Qualified Opportunity Zone provisions in the same manner as for other purposes of the Internal Revenue Code. Therefore, so as long as the LLC is not a disregarded entity (and is instead taxed as either a partnership or a corporation), it should qualify as a Qualified Opportunity Fund, assuming all other requirements are met.
The key point here is that if you plan to set up a single member LLC to be your own OZ fund, then you must file an election for the LLC to be taxed as a corporation using IRS Form 8832. If you don’t file the election, then the tax regulations automatically provide that the LLC is a disregarded entity and the result is that you don’t have an entity to function as the fund, which is a critical requirement.
If you’d like more information on Opportunity Zones, please take a look through our web-based OZ resource center — or feel free to contact us at 1-800-339-1031.