Yes, as long as you pas the 90% and 70% tests.
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How strict is the “sin list” rule?
A QOZ business can’t be one of the businesses on the “sin list”, but is it possible for a business to obtain some portion of its revenues from proscribed business activities? Could a health club have a tanning bed in the corner, accounting for some small portion of its business activity, without falling foul of the rule against suntan facilities, for instance?
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Good question. I do not know where the line is between a "sin activity" and a "sin business." However, the sin business provisions have been around since 1986, so I am sure there is an answer with some research.
Without regulations to give us tight guidance, I would recommend the following: Create a separate LLC for the sin business and one for the health club. The fund will own the health club and the sin business will be held outside the fund. Hopefully future regulations will allow allocation of up to 10% of business activity to be from a sin tax.
You should be all right if a de minimis portion of your revenue comes from a "sin business," as long as the overwhelming majority of revenue comes from a legitimate business and the "sin business" is incidental. The threshold for determining when the IRS would take issue with the nature of a business is not yet clear. I'd ballpark it at around 3% of total revenue for the enterprise, but that's a guesstimate. Once you exceed that general proportion, you're playing with fire.
The sin business listing is strict, but a minor amount of revenue from a tanning bed or running the food and beverage services through an independent legal entity will unlikely disqualify an OZ fund.
It would present a risk of disallowance of benefits. It might be possible to carve out an allocation for that revenue somehow, but it becomes a complicated issue once a sale or exchange of the QOF occurs after 10 years. To be safe, I'd say no. You have some risk if you proceed if it was examined.
This is a position that would have to be analyzed on a case-by-case basis. The question to answer is whether or not you are in the trade or business of providing tanning services. You might be able to make the case that one or two tanning beds at a health club by itself is not a trade or business and is de minimis to the overall trade or business that is the health club. There is no precedence in this area immediately available that I am aware of without drumming up case law or specific IRS advice indicating an "all or nothing" approach or looking at the principal trade(s) or business(es) of an entity/taxpayer under the sin business rules. Likely this is a grey area to look at with tax or legal advice in your individual case. If being conservative, don't include the tanning to preserve your tax benefits!
I wouldn’t test the line. Let someone else do it under the all pioneers get shot mantra.
The law and the regulations state that the business cannot be a sin business. They do not say partially or suggest any type of allocation or grandfather percentage.
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