Late last week, the governors of New York and Pennsylvania submitted their selections for opportunity zone designations to the U.S. Department of Treasury. Those nominations are expected to be approved by Treasury to take advantage of the new federal tax incentive program.  The federal Opportunity Zone program is a new tax incentive designed to direct investor capital into various low-income and distressed areas around the country. The program affords investors the opportunity to defer and reduce capital gains that are invested in opportunity funds. In addition, an investor who holds an interest in an opportunity fund for 10 years or more does not pay any tax on the gain when the opportunity fund investment is sold or transferred.  Additional details can be found in an earlier article we published here.

A listing of New York’s 514 zone nominations can be found here.

A listing of Pennsylvania’s 300 zone nominations can be found here.

We will continue to keep you updated as more details emerge on this transformative program, including expected guidance from the Internal Revenue Service regarding qualified opportunity fund certification and qualified opportunity zone property.

In recent guidance issued by the Pennsylvania Department of Revenue in response to the passage of the Tax Cuts and Jobs Act, the Department indicates that the 100 percent depreciation deduction will not be available for property placed in service after September 27, 2017.  This marks a stark departure from the previous policies of the Department.

Accordingly, while federal income tax law provides for a 100 percent depreciation or expensing deduction to be available for assets placed in service after September 27, 2017, no such deduction will be available for Pennsylvania corporate net income (CNI) tax purposes.  The cost recovery for the property will only be available upon sale or disposition of the asset in question for CNI tax.  This represents a change in policy for the Department which did allow for 100 percent bonus depreciation provided for in 2010 and 2011.

Taxpayers will have to track federal and state basis carefully and make sure to claim the appropriate deduction for federal income tax versus CNI tax.  Proper record keeping will also ensure that the appropriate basis adjustment is made from federal basis in the year of sale or disposition to account for the state’s decoupling from federal law.