Subchapter Z of the Tax Cut and Jobs Act of 2017: Leveraging Growth Economics for Profit

in Finance/Government/Tax

By Claudia Lin

The Tax Cut and Jobs Act of 2017 provided for the creation of opportunity zones, intended to stimulate the economy in low-income areas. The Act provides financiers and entrepreneurs with significant incentives to invest in qualified zones.


With 52.3 million Americans living in economically distressed communities and 84.8 million living in prosperous communities,[1] the post-2008 economic recovery in the United States has been geographically concentrated,[2] leaving many geographic areas behind.[3] In December 2017, the United States legislature attempted to address this disparity in Section 12823 of the Tax Cut and Jobs Act (the “TCJA”).[4] The section adds Subchapter Z to the Internal Revenue Code. In order to encourage economic development in these zones, the section allows each state to designate low-income zones in which investors can reinvest their money in exchange for the deferment of capital gains recognition, and if the money is invested in the zone beyond a requisite period of time, a lower capital gains tax rate.

Investing in Opportunity Act and Subchapter

The Investing in Opportunity Act (H.R. 828/S.293) (the “Proposed Act”) was introduced by bipartisan supporters in both the House and Senate. The Proposed Act eventually would form the foundation of Section 12823 of the TCJA with many of its proposals included in the final TCJA.

Designated Opportunity Zone Tracts

The Act enables the governors of each state to designate “Qualified Opportunity Zones” (“QOZs”) which would use tax incentives to encourage investments in areas that have struggled with job creation and economic growth.[5] Under Subchapter Z, governors are encouraged to nominate tracts of land to be designated as a QOZs.[6] A governor may designate up to twenty-five percent of the number of low-income communities in a state as QOZs.[7] A “Low Income Community” is defined as any census tract if: “(A) the poverty rate is at least 20 percent, or (B) the median family income does not exceed 80 percent of statewide median family income or, if in a metropolitan area, the greater of 80 percent of metropolitan area median family income.”[8]

While Subchapter Z does not adopt the Proposed Act’s guidance for governors about how they should choose areas to designate, the Proposed Act instructed governors to look to areas that are “geographically concentrated and contiguous clusters of population tracts,” and asked governors to pay particular attention to areas that: (1) already have state initiatives attracting investment and startup activity; (2) have historically had success with other development programs, such as “promise zones, new market tax credit, empowerment zones, and renewal communities”; and, (3) have “recently experienced significant layoffs due to business closures or relocations.”[9]

By March 21, 2018, each state’s governor should have nominated tracts for designation by notifying the IRS in writing of the nomination or requested a thirty (30) day extension.[10] The IRS then must certify the nomination and designate the tract as a QOZ within thirty (30) days of receiving the notice.[11] Once certified, the designation remains in effect for ten (10) calendar years.[12]

Qualified Opportunity Funds (“QOFs”)

One way to reap the benefits of Opportunity Zones is to invest in a Qualified Opportunity Fund (“QOF”). QOFs are partnerships or corporations that are organized for the purpose of investing in qualified property in a QOZ. “Qualified opportunity zone property” includes investments in “qualified opportunity zone stock,” “qualified opportunity zone partnership interest,” and “qualified opportunity zone business property.”[13] These categories include investments in new or substantially improved tangible property, including commercial buildings, equipment, and multi-family complexes in QOZs.[14] The Community Development Institutions Fund of the Treasury Department will oversee QOFs.[15]

QOFs help investors pool their resources to maximize the opportunities for local businesses in QOZs, and mitigate risk by diversifying investments. Investors that reinvest capital gains proceeds into a QOF within 180 days of a sale of disposition can defer the realization of those capital gains until the earlier of the date that the taxpayer sells its interest in the QOF or December 31, 2026.[16] If the interest in the fund is held beyond certain threshold years, then the capital gain to be taxed will be incrementally reduced. If the interest is held for at least five years, ten percent of the original capital gain will be eliminated.[17] If held for seven years, an additional five percent of the original capital gain will be eliminated.[18] If held for all ten years, none of the appreciation of the QOF will be taxed.[19]

Who Should Be Interested

Small Businesses

This program will help small businesses, projects, and commercial property located in QOZs attract financing.[20] Opening a business is a risky. For many small businesses, if not most, capital has to be raised at the outset. The QOZs are designed to attract uninvested capital that could be an important source of funding for these businesses.[21]


Subchapter Z of the TCJA benefits investors by removing barriers to investment through a capital gain deferral. When investing in an QOZ, “Opportunity Funds” allow investors to pool their resources, concentrating capital by directing it to the QOZs designated by governors and rewarding long-term investments.[22] This program provides investors the opportunity to defer current capital gains, increase their basis in their current investments, and abate all future capital gains on the investment.[23]


Subchapter Z of the TCJA is poised to increase economic opportunity in areas that are currently disadvantaged. Savvy investors and small business owners located in a QOZ should aim to leverage this new law to their advantage.





[1] In 2017 the Economic Innovation Group, a bipartisan organization advocating for policies empowering entrepreneurs, released the Distressed Communities Index (DCI), which used seven indicators of well-being to measure the relative prosperity of different U.S. communities.

[2] 2017 Distressed Communities Index, Econ. Innovation Group, (last visited Mar. 18, 2018).

[3] Investing in Opportunity Act and Geographic Inequality, (2018), (last visited Mar. 19, 2018).

[4] Section 12823 is found on page 130 of the TCJA, titled “Subchapter Z-Opportunity Zones.”

[5] Jim Tankersley, Tucked Into the Tax Bill, a Plan to Help Distressed America, N.Y. Times (Jan. 29, 2018),

[6]Internal Revenue Code, Sec. 1400Z-1(b)(1)(A).

[7] The Tax Cut and Jobs Act of 2017, H.R. 1, 115th Cong. § 13823.

[8] Id.

[9] Id.

[10] IRC § 1400Z-1(c)(2)(B) (2017).

[11] Internal Revenue Code, SEC. 1400Z-1(c)(2)(A)

[12] Internal Revenue Code, SEC. 1400Z-1(f)

[13] Id.

[14] Id.

[15] Id.

[16] Jonathan Katz et al., Capital Gain Deferral and Reduction – Benefits of Investing in Opportunity Zones, The Nat’l L. Rev. (Feb. 1, 2018),

[17] Id.

[18] Id.

[19] Id.

[20] Qualified Opportunity Zones and Tax Credit Incentives Under the Tax Cuts and Jobs Act, Greenberg Traurig (Jan. 25, 2018),

[21] Economic Innovation Group, supra note 2.

[22] RCAP Endorses Investing in Opportunity Act, Rural Community Assistance Partnership (Oct. 26, 2017),

[23] Qualified Opportunity Zones and Tax Credit Incentives under the Tax Cuts and Jobs Act, supra note 14. Short forms are different for statutes. See BBR 12.10(b).