Late in June, the legislature passed, and the Governor signed, House Bill 113 to establish an aggressive new tax incentive for West Virginia businesses that invest in West Virginia’s 55 Qualified Opportunity Zones.
The legislation allows businesses in West Virginia to subtract from their federal adjusted gross income an amount equal to the net income that is directly derived from qualified opportunity zone businesses located in West Virginia. The ultimate effect of this incentive is to completely eliminate state income taxes for West Virginia qualified opportunity zone businesses for up to ten (10) years. This incentive is designed to supplement the Federal Opportunity Zone benefits and further stimulate economic growth and investment in designated low-income communities.
While states across the country are taking steps to enact policies that will make their communities more competitive from a return on investment standpoint, West Virginia’s new law is unique. No other state in the country has proposed and enacted a program that will effectively eliminate all state income taxes on qualified opportunity zone businesses. When paired with the federal program, opportunity zone investments in West Virginia could offer substantial internal rate of return opportunities with the right project.
In order to be eligible for the tax incentive, the qualified opportunity zone business must be a “newly registered” business in West Virginia, i.e., registered on or after January 1, 2019, and before January 1, 2024. Additionally, the business must satisfy the federal program requirements and be considered a qualified opportunity zone business as defined in Internal Revenue Code Section 1400Z-2. Assuming the businesses remain in compliance with the federal program, taxpayers can claim the benefit for 10 years beginning with the first tax year their business qualifies as an opportunity zone business. Businesses that existed prior to January 1, 2019, may not be reorganized to qualify as an eligible opportunity zone business.
The timing of the new law is important. Investment in qualified opportunity zones is beginning to take on a new sense of urgency, as the December 31, 2019, deadline to maximize benefits under the program draws closer. West Virginia’s new law takes effect ninety (90) days from passage (September 22, 2019) and should result in increased investment activity in the final two quarters of 2019.
Both the federal and West Virginia opportunity zone programs present a valuable investment opportunity. To have confidence that you qualify for opportunity zone incentives under either program, or to move forward with organizing a new business venture, contact the authors of this article.