Until a few weeks ago, I had never heard of Long Island City. It’s in the westernmost portion of Queens, one of New York City’s five boroughs. And it’s in this fast-gentrifying enclave that Amazon has decided to plunk down a new headquarters and create up to 25,000 new jobs.
What made Amazon pick Long Island City? The mainstream media highlights the many incentives the company will receive, including:
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Payments from the state of New York worth over $1.5 billion based on the company creating the 25,000 new jobs.
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A cash grant of $325 million tied to the square footage of buildings Amazon will construct for its new headquarters.
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Infrastructure improvements from New York City valued at $2.4 billion.
But an enormous incentive for this project that almost no one is talking about originates in the bowels of the 2017 tax reform bill. It turns out that Amazon is investing in a “Qualified Opportunity Zone” (QOZ), a census tract with a poverty rate of 20% or higher or a median income of 80% or less than the surrounding area. And assuming Amazon has a gain from a sale or exchange that would otherwise be taxable, it will get some eye-popping tax benefits:
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It will defer paying tax on that gain until December 31, 2026.
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If it holds its investment at least five years, the company will eliminate 10% of that otherwise taxable gain; if it holds the investment seven years, it will eliminate 15% of the gain.
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If it holds the investment for a decade or longer, it will eliminate all future tax on capital appreciation through to 2047.
Even if Amazon sells its investments in Long Island City, so long as the company has held them for at least 10 years, it can roll over its gains into another QOZ investment to retain tax deferral. It’s a pretty sweet deal that will save Amazon billions of dollars in tax payments.
It’s not just Amazon that can benefit from this provision. You can too, if you have a gain from a sale or exchange that would otherwise be taxable.
QOZs are not the only largely overlooked benefit in last year’s tax reform bill. Another incentive will help some owners of pass-through entities (PTEs) such as partnerships, LLCs, and S corporations save a bundle in tax.
Under the new law, the top personal income tax rate is now 37%, a full 16% higher than the flat corporate rate of 21%. Congress gave PTE owners (and some investors) a way to compensate for this perceived inequity by allowing them, in some circumstances, to deduct 20% of “qualified business income” (QBI) from their taxable income.
No matter how your PTE generates income, it could qualify for the deduction if your adjusted gross income is under $157,000 annually ($315,000 married filing jointly). The deduction phases out above that amount if your PTE is a “specified service trade or business” (SSTB). An SSTB is a business that provides services relating to health, law, consulting, athletics, financial services, brokerage services, or any service relies on the reputation or skill of its employees or owners.
President Trump is an example of someone who will benefit from the new rules. He owns hundreds of PTEs, and the Trump Organization relies heavily on his reputation for its success.
The guidelines the IRS recently issued clarify the PTE rules that benefit Trump by allowing his style of business to avoid being defined as an SSTB. Your business might qualify too.
But if you own an SSTB and have income well above these thresholds, you have other options.
Want to learn more about the incentives in the 2017 tax reform bill? Earlier this year, I wrote a five-part series of articles for subscribers to our Nestmann Inner Circle Gold service describing how members can unlock big savings from the new bill.
And now that the IRS issued new regulations for qualified opportunity zones and the 20% deduction, I have written a new Alert discussing the nuts-and-bolts of how Nestmann Inner Circle members can benefit from them. I also cover the alternatives for SSTB owners who don’t qualify for the 20% deduction.
If you’d like to unlock these tax savings for yourself, try a risk-free subscription to the Nestmann Inner Circle Gold. Click here to find out more.
I doubt these incentives will last forever; the soaring federal debt will eventually force Congress to increase taxes. As my grandfather used to tell me when circumstances were in my favor: “Make hay while the sun shines.”
