HBK Principal and Cannabis Solutions Group leader Christopher Marrie will be featured at two upcoming local events related to business opportunities in the cannabis/hemp space. On February 11, Chris will moderate a panel of speakers at the Cannabis Private Investment Summit of Florida at Greenspoon Marder, LLP, in Ft. Lauderdale. The day-long Summit is for business owners, investors, financiers, industrialists and others considering investing in or starting a Cannabis business. Topics include: -An overview of legal cannabis -The benefits of an investment fund in the cannabis industry -Cannabis valuations -Medical cannabis and capitalizing on cannabis before the end of its prohibition -Identifying states prime for investment opportunities On February 21, Chris will participate in a roundtable discussion on the potential benefits and pitfalls of investing in cannabis and hemp-related projects at the Lake County Bar Association’s monthly lunch-and-learn at the Sidney & Berne Davis Art Center. Chris is a recognized authority on the industry, and has been instrumental in the development and growth of the HBK Cannabis Solutions Group. He has worked extensively with clients in all facets of the industry. If you are looking for business advisory, taxation, investment and/or wealth management advice relative to the Cannabis industry, we encourage you to register for one of these events. For more information about the services of the HBK Cannabis Solutions Group contact Christopher Marrie at CMarrie@hbkcpa.com or call 239-263-2111 . For registration or more information about the Cannabis Private Investment Summit of Florida, please visit REQUEST AN INVITATION HERE, or contact Info@kahnerglobal.com For more information on the Lake County Bar Association’s discussion of hemp, visit REGISTER HERE or contact the Lake County Bar Association at Admin@leebar.org or call 239-334-0047.

On April 17, 2019 the U.S. Treasury released its newest and most highly anticipated proposed Regulations covering Opportunity Zones. Many investors, as well as legal, accounting, and financial professionals, sought clarification on a cadre of issues related to Opportunity Zones operations and specific definitions including:

• Timing and amount of the deferred gain that is included in income
• Treatment of leased property used by a quality opportunity business
• Qualified Opportunity Zone (“QOZ”) business gross receipts testing
• The “reasonable period” test for a Qualified Opportunity Fund (“QOF”) to reinvest proceeds from a qualified asset sale penalty-free

Timing and amount of the deferred gain that is included in income The proposed regulations state that a gain deferred with an equity investment in a QOF will be recognized when they are sold or exchanged by December 31, 2026, whichever came first. While the timing related to the end of tax year 2026 is straightforward, the proposed regulations more clearly define sold or exchange in relation to this timing matter. The intent being to inhibit investors from decreasing their investment level. Distributions of cash and other defined properties are now also gain triggering events. There are different definitions for various entities and as to how an inclusion event is calculated. Transfers by gift will generally be considered inclusion events with the exception of gifts to grantor trusts, since the granter reports the income earned from those trusts. Contrary to the gift rule, most transfers caused by death to an estate and then subsequently to individual beneficiaries or to trusts are not considered inclusion events. When the deferred gain of property received upon death prior to December 31, 2026 is included in income on the earlier of a disposition or December 31, 2026, the income will be treated as income in respect of a decedent. Distributions in excess of basis will also trigger gain recognition. Treatment of leased property used by quality opportunity business In order to meet the substantially all“70% asset” test, a QOF can include QOZ business property. The property must be tangible, its original use in line with QOZ business where it is being used, or the QOF business must substantially improve the property. Additionally, substantially all the assets businesses use must take place within QOZ. The proposed regulations remove the substantial improvement requirement for leased tangible property, as most taxpayers do not have basis in leased property. Further, leased property does not carry the requirement to originate from an unrelated lessor. Opposingly, the sale of tangible property must be from an unrelated party in order to qualify for deferral. The proposed regulations also address certain aspects of lease terms. The lease in place must be at market value. It should be noted that if lessee and lessor are related, the property will not qualify for treatment as QOF property if the lease terms allow for a prepayment of fees in excess of 12 months. Leased real property is also addressed. If the lease for real property is entered into and at the time there is an expectation that the real property will be sold to the QOF for any amount other than fair market value, the real property will be excluded from the definition of QOF business property. These sections give example to the Treasury’s effort to reduce benefits relayed to related parties via preferential terms of lease arrangements. Qualified Opportunity Zone (“QOZ”) business gross receipts testing One of the more highly anticipated sections of the proposed regulations involves gross receipts testing. To meet the qualified business entity definition any entity must derive half of its gross income from the active trade or business within the QOZ. We have been provided with three safe harbor tests, the first of which is based on service hours. If 50% of the service hours performed by employees or independent contractors falls within the QOZ, then the test is passed. The second test is the same 50% threshold, but here the metrics being measured are the amounts being paid to employees or independent contractors operating within the QOZ. If this test is met, then the business meets the 50% gross receipts test. The third safe harbor test states that if the tangible property and the management and operational functions of the business needed to generate 50% of the gross receipts are located within the zone, then the 50% gross receipts test has been met. This last safe harbor test is especially important for potential QOZ business opportunities such as manufacturing. Before the issuance of this batch of regulations, there was concern that if a manufacturing operation located within a zone created a product, and then shipped those products to customers outside of a zone, those receipts may not be eligible for the test. The third safe harbor clearly addresses this concern and give thresholds to test the ratio of the QOZ assets to total assets in service. Lastly, there is a facts and circumstances test allotted to address uncommon conditions business arrangements where more than 50% of receipts are derived from a QOZ. The “reasonable period” test for a Qualified Opportunity Fund (“QOF”) to reinvest proceeds from a qualified asset sale penalty-free Prior to these proposed regulations, many taxpayers wanted to know what the definition of a reasonable amount of time meant in the context of reinvesting proceeds stemming from a QOF investment sale, as well the treatment of a potential gain from that sale. The proceeds from such a sale will continue to qualify for the substantially all assets, or 90% test so long as they are reinvested within 12 months of the date of the sale. Furthermore, during that 12-month grace period, the proceeds must remain rather liquid. The proceeds can only be held in liquid forms, such as cash, equivalents, or debt termed at 18 months or less. This doesn’t allow for Opportunity Funds to use proceeds from QOF investment sales for any lengthy period for any assets outside of very liquid assets. This regulation aims to be a preventative measure put in place to halt the removal of funds from bona fide QOF investments for alternative, “non-qualified” investments. While we wait for the Treasury to finalize these proposed regulations the general consensus to these provisions is largely taxpayer friendly among many investors, both individuals and institutions. The Treasury used its ability in interpreting the legislation to make the law more able to be utilized by operating entities. The benefits of a real estate based QOZ investment were more clearly defined in previously issued rounds of regulations. Those more clearly defined benefits have led to more REIT, or real estate-focused, investment products being brought to market. Now operating entities have had additional clarity provided as to the specific advantages they are afforded by these new Regs. This could very well catalyze the infusion of capital raised by private equity and venture capital earmarked for the creation of their own respective fund meant to invest in QOZ businesses. General prudence and due diligence should still be administered when making investments in any QOFs. The overall quality of the underlying assets of the investment must have merit primarily as a sound investment, regardless of tax-benefits. Please contact Anthony Giacalone at AGiacalone@hbkcpa.com with any questions you may have regarding Opportunity Zones.

Of the many changes that came from the Tax Cuts and Jobs Act (“The TCJA”), Qualified Opportunity Zones (“QOZ”) have been one of the most talked about provisions as the 2018 tax season progresses. As a recap, through QOZs, taxpayers may elect to temporarily defer the tax to be paid on capital gains until the 2026 tax year that are invested in a Qualified Opportunity Fund (“QOF”) within 180 days of gain recognition, the QOF must invest 90 percent of its capital in QOZ Property. Taxpayers who hold investments in a QOF for at least five years may exclude 10 percent of the original deferred gain, and investments held for more than seven years qualify for an additional five percent exclusion of their original deferred gain. In what could be the most attractive feature of the new law, after 10 years, post-acquisition appreciation is 100 percent excluded from taxable income for federal tax purposes. Many states are still evaluating how they are going to deal with the new QOZ rules.

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The Internal Revenue Service has just released its first installment of the much anticipated proposed rules relating to Qualified Opportunity Zones (QOZ) that will help investors use a new tax incentive created by 2017 Tax Cuts and Jobs Act. QOZs are underdeveloped areas that have been certified by the federal government allowing for special tax breaks to promote investment in these nearly 9,000 U.S. regions. These proposed rules would govern investments made in QOZs to provide various tax advantages to investors in two ways. First, capital gains placed in certified opportunities zone funds will be deferred and not be taxed through the 2026 tax year, or until the time in which the investment is sold, whichever occurs first. Second, gains from these QOZ investments are “permanently” shielded from income taxes if such investments are held for at least 10 years. Otherwise, gains from the initial investments in qualified opportunity funds will be discounted by up to 15% if held for 7 years and 10% for 5 years. The proposed rules state that any type of capital gains including from marketable securities are eligible for this preferential tax deferral. Additionally, the opportunity to invest in these qualified opportunity funds is available to individual taxpayers, business entities, REITs and estates and trusts. The proposed rules also clarify how to calculate substantial improvements in the property. and The rules state that taxpayers do not need to include the value of the land for the purpose of calculating how much the law requires they spend on qualifying renovations, or refurbishments of the property. For example, if a taxpayer paid $10 million for a warehouse and land, with the building being valued at $500,000, the fund must spend at least what the building is valued, or $500,000 as opposed to the total $10 million purchase price, in renovations. This exclusion of land value for the purposes of determining substantial improvements made within a QOZ applies to both tangible property, such as equipment, and realty. This will create an increased importance as to the qualified valuations performed on property located in within the boundaries of a QOZ. Additionally, investors will have 180 days from the sale of stock or businesses to place the proceeds from those sales in opportunity funds to qualify for these tax breaks. The Internal Revenue Service (IRS) also stated in these proposed rules that funds have 30 months from when the money is placed in them to perform the required renovations. The Treasury also created a 70-30 rule that measures whether a given business counts as having “substantially all” of its assets in an opportunity zone. Under that rule, as long as 70% of a business’s tangible property is in a zone, the business doesn’t lose its ability to qualify for the tax break. In the proposed regulations, Treasury does ask for input on a couple of technical questions, such as what happens if a business abandons property in an opportunity zone and how to treat movable property, such as vehicles, that may possibly spend part of their time outside the QOZ. While these rules have provided some of the answers to questions on the minds of taxpayers, some additional items still remain unanswered.

• Will grace periods will be permitted related to the proceeds of large scale asset sales?
• Will the emerging cannabis and gambling industries will be permitted benefit from these tax advantages?
• What benefits will be able to be yielded by lessees of QOZ properties?
• Will partnerships and partners need to invest as a singular unit or if partners are permitted to invest their portions of asset sales individually into their own qualified opportunity zones?

The Treasury is expected to announce additional guidance on opportunities zones before the end of the year and are currently under review by the IRS. In the meantime, taxpayers can rely on the proposed regulations while the IRS solicits comments and considers changes in the final version. Since this is a developing area, HBK will continue to provide updates on the QOZ issue as it becomes available. Committing capital to a QOF is an option with many variables and it is a decision investors/taxpayers should weigh carefully. If there are any questions on this, please contact your local HBK team representative to discuss further. For more details or other related questions, please contact a member of the HBK Tax Advisory Group.