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LOUISIANA TAX LAW UPDATE
Louisiana Income Tax Regulation Adopted for Related-Party Expenses Add-back
Under a recent law change, when computing a corporation’s Louisiana net income, a corporation shall add-back, subject to certain exceptions, otherwise deductible interest expenses and costs, intangible expenses and costs, and management fees resulting from direct or indirect transactions with one or more related members. Effective April 20, 2018, the Louisiana Department of Revenue has amended an administrative rule to clarify the corporate income tax add-back rules and create additional exceptions for “passed through” expenses and unreasonable add-backs.
Pursuant to LAC 61:I.1115, exceptions to the add-back requirement exist if the taxpayer can provide documentation substantiating that:
- the item of income corresponding to the taxpayer’s expense, cost, or fee is subject to a tax based on or measured by the related party’s net income in Louisiana or any other state;
- the item of income corresponding to the taxpayer’s expense, cost, or fee is subject to a tax based on or measured by the related party’s net income in a foreign nation that has an income tax treaty with the United States;
- the transaction giving rise to the expense, cost, or fee was not principally to avoid any Louisiana tax;
- the expense, cost, or fee was “passed through” by the related party to an unrelated third party in an arms-length transaction; or
- the add-back is unreasonable.
FEDERAL TAX LAW UPDATE
Recently Created Opportunity Zones Provide New Investment Vehicle
The recently enacted Tax Cuts and Jobs Act added a new section to the Internal Revenue Code that creates Opportunity Zones. Opportunity Zones are designed to spur economic development and job creation in distressed communities by providing tax benefits to long-term private investors.
If an investor realizes a gain from the sale or exchange of a capital asset to an unrelated party, the new Code section permits three tax benefits if the gain is reinvested in an Opportunity Fund within 180 days of the sale or exchange:
1. An investor can defer tax on the prior gain until the earlier of the sale or exchange of the investment in the Opportunity Fund, or December 31, 2026.
2. The basis of the investment is increased by 10% of the deferred gain, such that 10% of the deferred gain will be eliminated if the investor holds the investment for at least five years, and by an additional 5% if held for at least seven years, for a total elimination of 15% of the deferred gain.
3. If the investor holds the investment for at least ten years, the basis of the investment is increased to its fair market value on the date the investment is sold or exchanged, which will result in the permanent elimination of the gain on any appreciation accrued after the investment is made in the fund.
In any event, if the investor is holding the investment on December 31, 2026, the investor must recognize and pay taxes on the deferred gain on that day, subject to any increase in basis the investor may have received for holding the investment for five years or more.
An Opportunity Fund is a privately managed investment vehicle organized as either a partnership or corporation for investing in eligible property that is located in an Opportunity Zone and that utilizes the investor’s gains from a prior investment for funding the Opportunity Fund. An Opportunity Fund must hold at least 90% of the fund’s assets in certain qualifying businesses (i.e., stock or partnership interest) or property located in the Opportunity Zone. Each form of eligible Opportunity Zone businesses and property must meet certain specifications, e.g., substantially all of the tangible assets of the business are used in an Opportunity Zone and 50% of the gross income is earned in the active conduct of the business in an Opportunity Zone (among other requirements).
To become an Opportunity Fund, an eligible taxpayer self-certifies; thus, no action or approval by the IRS is required. To self-certify, the taxpayer merely completes a form, which is set to be released in the summer of 2018, and attaches the form to the taxpayer’s timely filed federal income tax return for the taxable year.
An Opportunity Zone is a low-income census tract designated by the Governor of a state and subject to certification by the IRS. Each certified Opportunity Zone retains its designation for 10 years. The first Opportunity Zones, covering parts of 18 states, were designated on April 9, 2018, and Louisiana secured certification for 150 lower-income census tracts to be Opportunity Zones.
The IRS will be providing additional information regarding Opportunity Zones over the next few months. Until then, the actual mechanics of facilitating the investments described above will remain conceptual. However, unless the regulations substantially limit the broad potential drafted into the Act, Opportunity Zones are likely to emerge as the flexible tool of choice for investing in low-income communities.