Senate Lawmakers Examine Tax Reform’s Effect on Small Businesses


The Senate Small Business Committee held a hearing on expanding opportunities for small businesses through the tax code. Senate lawmakers examined tax reform’s effect on small businesses and discussed witnesses’ proposals to address ambiguity in the new tax code. Various provisions of the Tax Cuts and Jobs Act (TCJA) were discussed among lawmakers and witnesses. Specifically, Opportunity Zones under the TCJA were of particular focus.

Opportunity Zones

The TCJA created certain tax benefits for long-term business investment in Qualified Opportunity Zones, which generally include economically distressed communities. Although the TCJA did not receive a single Democratic vote, the Opportunity Zones program was generally based on a bipartisan bill sponsored by Senators Tim Scott (R-S.C.) and Cory Booker (D-N.J.).

The TCJA’s Opportunity Zones program established tax incentives to spur business investment in these low-income communities to produce economic growth. Investor tax benefits include:

  • a temporary tax deferral for capital gains reinvested in a qualified opportunity fund;
  • the elimination of up to 15% of the tax on the capital gain that is invested in the qualified opportunity fund; and
  • the potential for a permanent exclusion of tax when exiting a qualified opportunity fund investment.

“Opportunity Zones are the most innovative and ambitious federal attempt to encourage long-term private investment in low-income communities in at least a generation,” John Lettieri, president and CEO of Economic Innovation Group, testified. However, “investors have yet to receive the formal guidance or regulatory clarity needed to inform their decision-making,” he added.

Clarity/Reporting Metrics

Witnesses told lawmakers that definitional clarity and proper reporting metrics for the Opportunity Zone program are needed. Lettieri noted that Treasury has broad authority in determining Congressional intent for defining key terms pertaining to Qualified Opportunity Zone business and investment. “These rules must be designed with practical considerations and basic market flexibility in mind. If too narrow in scope or impractical in nature, the rules would undermine the very purpose for which this incentive was created,” Lettieri testified.

Additionally, John Arensmeyer, founder and CEO of Small Business Majority, stressed the importance of measuring the program’s success. Those metrics should include evaluating success “based on the number of jobs created, where those jobs are located, employee wages and the number of businesses created, particularly businesses formed by women or people of color,” Arensmeyer told lawmakers.

Treasury

Treasury Secretary Steven Mnuchin recently expressed his support for Opportunity Zones. “I couldn’t be more excited about the opportunity zones,” Mnuchin said in an interview last week. “I think there’s going to be over $100 billion dollars in private capital that will be invested in opportunity zones,” he added.

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