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Section 263A Opportunities for anyone who built or remodeled a building after 2017
Section 263A of the Internal Revenue Code deals with the capitalization of certain costs related to the production of tangible property. It requires businesses to capitalize certain costs that are directly related to the acquisition of property. However, there is an exception for small businesses, often referred to as the “Small Business Exemption.” This exemption allows qualifying small businesses to avoid some of the requirements of Section 263A.
Small Business Exemption Criteria
To qualify for the small business exemption from Section 263A, a business must meet the following criteria:
Average Annual Gross Receipts: The business must have average annual gross receipts for the three preceding tax years that do not exceed $30 million (as of 2024, this is adjusted for inflation).
Benefits of the Small Business Exemption
Qualifying for the small business exemption means that the business does not have to capitalize additional costs under Section 263A. It means that the business can deduct these costs immediately rather than capitalizing and depreciating them over time.
What Costs are Exempt?
The Small Business Exemption primarily applies to many costs. Some of these include:
Documentation and Compliance
While the Small Business Exemption can provide relief for qualifying businesses, it’s essential to maintain proper documentation and records to support the exemption. Specialty Tax, LLC helps ensure compliance.
CASE STUDIES 263A
OPPORTUNITY ZONES
Opportunity Zones were created as part of the Tax Cuts and Jobs Act of 2017 (TCJA). They are a new community development program aimed at incentivizing long-term investments in low-income urban and rural communities throughout the United States. The program provides tax incentives for investors to re-invest their unrealized capital gains into Opportunity Funds, which are specialized vehicles dedicated to investing in designated Opportunity Zones.
Deferral of Capital Gains Tax
A benefit of investing in Opportunity Zones is the deferral of capital gains tax. Investors can defer tax on prior gains invested in an Opportunity Fund until the earlier of the date on which the Opportunity Zone investment is sold or exchanged, or December 31, 2026.
Tax-Free Growth of Opportunity Fund Investment
If the Opportunity Zone investment is held for at least 10 years, investors can qualify for a permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund.
Qualified Opportunity Funds (QOFs)
To qualify for these tax benefits, investors must invest in a Qualified Opportunity Fund (QOF), which is an investment vehicle organized as a corporation or a partnership for the purpose of investing in eligible property located in an Opportunity Zone.
Eligible Investments
Investments in Opportunity Zones can include new construction, substantial improvements to existing buildings, and investments in businesses located within the zones.
Designation of Opportunity Zones
Opportunity Zones were selected by each state and certified by the U.S. Department of the Treasury. There are more than 8,700 designated Opportunity Zones across all 50 states, the District of Columbia, and five U.S. territories.
Requirements and Regulations
Investors must meet specific requirements and follow detailed regulations to qualify for the tax benefits associated with Opportunity Zones.
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