Amazon.com Inc. could benefit from federal tax breaks designed to revitalize struggling communities if it builds all or part of its second headquarters in Long Island City.
The company’s eligibility comes down to whether the IRS would view a new headquarters as a new entity or as a part of Amazon’s larger umbrella.
Congress, in the 2017 tax law, established tax incentives for investors that commit to long-term projects in low-income communities. Investors can receive tax payment deferrals and additional tax cuts if their projects fall within areas designated as opportunity zones. For qualified multibillion-dollar investments, that would mean hundreds of millions of dollars in tax benefits.
Much of Long Island City, N.Y., which is considered to be a top contender for Amazon’s HQ2 project, is located inside an opportunity zone. The Crystal City area of Arlington, Va., rumored to be another top H2Q contender, isn’t.
The IRS, in proposed regulations to clarify the tax treatment of investments in opportunity zones, suggested 70 percent of a business must be located inside an opportunity zone to qualify for the tax benefits. Observers are split over whether Amazon’s HQ2 would meet that threshold.
Those tax perks would be lucrative for Amazon, which has said it plans to invest more than $5 billion in building a second U.S. headquarters. Amazon didn’t respond to Bloomberg Tax questions about the opportunity zone program.
Eligibility in Question
Amazon would need to prove the new headquarters is a separate entity, not part of the company’s larger umbrella, under new rules the IRS has yet to finalize.
Amazon’s HQ2 project is expected to bring tens of thousands of jobs and serve as an engine for further development in the region.
Opportunity zones are designed to jump-start long-term development, John Lettieri, president and CEO of the Washington-based Economic Innovation Group, told Bloomberg Tax. But Lettieri was skeptical that HQ2 could qualify for the program.
“There is no way companies like Amazon could qualify for this,” he said.
Large multinational companies could never meet the proposed 70 percent requirement (REG-115420-18) because so much of the company is located in various parts of the world and not concentrated in one area, Lettieri said.
Lisa Starczewski, a shareholder and business adviser at Buchanan Ingersoll & Rooney PC, said in an email that Amazon’s headquarters could meet the proposed 70/30 test if construction or operation of the headquarters is organized and treated as its own business.
Big Companies Can Set Up Funds
The law allows taxpayers to defer paying tax on capital gains if those gains are invested in a qualified opportunity fund. Those funds can recycle capital gains into real estate development in designated opportunity zones.
Large companies can set up opportunity funds, Molly Meiners, principal deputy assistant secretary for public affairs at the Treasury Department, said in an email. The requirement now is that investment can be made by any “new” business.
The program isn’t without its critics.
Successful investments in opportunity zones will raise rent prices and push out current residents, said Timothy Weaver, an assistant professor with a specialization in urban policy and politics at the University at Albany.
Ultimately, the program gives a tax break to businesses that already were thinking about investing, Weaver said.
How It Works
The opportunity zone incentive is attractive because of its twofold tax break.
First, the capital gains moved into opportunity funds aren’t taxed until they are moved out of the fund, or 2026, whichever comes first. If an investor holds gains in a fund for five or seven years, their taxable capital gains are cut by 5 and 10 percent, respectively.
Next, any additional capital gains earned by the opportunity zone investment are exempt from tax if the investment is held for more than 10 years—a very attractive incentive for the real estate sector because development projects usually take that long.
If Amazon were to move $5 billion of capital gains into an opportunity fund and that fund held its investments for more than 10 years, the retail giant would cut its capital gains by $750 million, saving more than $150 million in taxes.
The initial tax deferral alone would be worth it for Amazon, said Jessica Millett, co-chair of the tax department at Duval & Stachenfeld LLP in New York.
Moreover, if the headquarters are maintained for more than a decade, Amazon wouldn’t pay any taxes on the appreciation of its original investment. As property values in Long Island City rise, an original investment could produce a large tax-free gain for the company.
The ability to qualify for these benefits may depend on Amazon’s corporate structure, Millett said, but ultimately the program is about real estate. This means Amazon should be able to buy a warehouse, build a headquarters, and qualify.
Other Incentives on the Table
The opportunity zone benefits aren’t the only potential tax incentives Amazon could take advantage of in building its new headquarters, said Sunder Jambunathan, co-founder of New York-based real-estate developer Certes Partners.
An Amazon HQ2 in Long Island City also could leverage New York City’s Industrial & Commercial Abatement Program, which provides property tax incentives for up to 25 years, and the New York State Excelsior Job Program, which provides tax credits for creating jobs.
New York wasn’t alone in aggressively going after the HQ2 project—finalist cities across the U.S. tried to woo the company with a variety of tax breaks and other economic incentives. Full details of those incentive packages may not become public for a while.
“What was being offered to Amazon may not be apparent until much later,” Jambunathan said.
(Corrects possible tax savings for Amazon in 21st paragraph)