“If you build it, he will come.”
The 1989 movie Field of Dreams hit a home run at the box office and drafted this inspiring line to number 39 in the American Film Institute’s 100 Greatest Movie Quotes of All Time. For those who haven’t seen the magical, feel-good movie: a ghost of baseball past repeatedly whispers these words to Ray, a young corn farmer and baseball aficionado.
Ray eventually interprets the mysterious message as direction to construct a full-size baseball diamond - where he should be growing corn. If he builds “it” in blind faith, someone will arrive. Despite appearing to have lost all sense and sanity, he creates the field…and seven long-dead ballplayers show up, including the notable Shoeless Joe Jackson and eventually, Ray’s father.
Though this movie is pure fantasy, many U.S. lawmakers seem to be of a like mindset, employing a similar approach to urban development: “If we build it, they will come;” it here refers to businesses and property construction; the word they points to people, customers, community…and therein, hope and prosperity for economically downtrodden cities and towns.
Peppered throughout our country of booming, revenue-generating cities lie areas of less abundance. The federal government recognized that these neighborhoods needed economic intervention.
With the Tax Cuts and Jobs Act (TCJA) of 2017, they designated nearly 9,000 locations as ‘opportunity zones,’ and added them to the tax code. These changes are intended to incentivize private entities by way of tax breaks when they invest in them.
Improving Their Odds
Many states and local municipalities, however, feel they need to pitch additional rewards to augment the appeal of opportunity zones to investors.
California’s governor is pushing for an incentive similar to the federal tax break for affordable housing and green technology. A Washington state rep wants to award investors $60 million in tax credits for bringing in jobs to economically challenged rural territories.
A delegate from West Virginia says he wants to line up his 55 opportunity zones as the most competitive in the country with a proposed 10-year state and local income tax reprieve for investors.
And the governor of Maryland looks to job creation and additional funding for affordable housing, small business loans, and workforce training, to warm up companies for opportunity zone participation.
In fact, Urban Atlantic is set to transform a 40-acre parking lot sprawl in Prince George's County, MD into apartments, shops, restaurants, a hotel, and office space for a healthcare company. A partner of the company admits that private investors could not finance the project without a “long list of incentives.”1
For all of this effort, luring investors to economically debilitated locations proves a tricky curveball to hit.
Oklahoma City can testify to this. Even though it passed a $50 million job creation initiative, which offers tax incentives to businesses for a mandated number of jobs, and its opportunity zone lumps in its tax increment financing district, the city has yet to capture even one investment in its 117 opportunity zones.2
Perhaps states and cities could further entice builders and property investors with promoting another federal tax-saving strategy waiting in the dugout: cost segregation.
A Runner on Third
Cost segregation can be a heavy hitter to bring in cash flow. It defers federal and state taxes through accelerated depreciation of certain assets. And a cost segregation study goes beyond the basic fixtures, furniture, and equipment, expanding opportunities for savings.
For instance, a typical commercial building holds a depreciable life of 39 years, 27.5 for residential properties. A cost segregation analysis reclassifies a facility’s interior and exterior components and cuts the depreciation period down to 5, 7, or 15 years, scoring a reduced tax liability.
The TCJA has also popped up cost segregation’s appeal even further – such as the revision that increased the bonus depreciation to 100% for properties placed in service after September 27, 2017. This change permits expensing of all shorter life property identified by the study in the year the property is placed in service.
Sliding into Home
Businesses may be hesitant to take a chance on investing in underdeveloped or destitute locales. But if they begin to ‘build it,’ people and prosperity are likely to come. And their bases are loaded with abundant tax savings to drive savings home to their bottom line.
Of course, the best way to approach any tax incentive strategy is to request some assistant coaching from a tax professional. A tax specialist knows the ins and outs of both federal and state benefits to score the highest savings possible.
1. Opportunity Zones Spur New State Tax incentives, PEW, 2019
2. States, Cities Add Sweeteners to Attract 'Opportunity Zone' Investors, Governing, 2019