IRS Provides Relief to Qualified Opportunity Funds and Investors
by Seth Schwartz, Tax Partner
In the wake of the widespread economic disruption caused by the COVID-19 pandemic, Federal agencies and legislators have extended deadlines and provided flexibility for a wide range of tax and other financial concerns. With the release of Notice 2020-39, the Internal Revenue Service (IRS) has provided additional flexibility to Qualified Opportunity Funds (QOF) investing in Qualified Opportunity Zones (QOZ). In the following we will detail the key provisions from Notice 2020-39.
Deadline Extension for QOF Investors
QOF investors with a deadline to invest their qualified capital gains in a qualified opportunity fund (“QOF”) between April 1, 2020 and December 31, 2020, now have until December 31, 2020 to invest those gains. This relief is applied automatically.
Relief for Testing Failures
A QOF must hold 90% of assets in a qualified opportunity zone property. This 90% standard is tested twice throughout the year, typically June 30th and December 31th. Those that fail the test are assessed a penalty if they cannot show “reasonable cause” for the failure.
The new IRS guidance removes penalties for QOFs that fail the 90% testing between April 1, 2020 and December 31, 2020. This failure will also be disregarded when the IRS determines whether a QOF meets the opportunity zone requirements for future tax years.
Relief for 30 Month Substantial Improvement Period
One of the key requirements that a qualified opportunity zone business property must meet is that substantial improvements, exceeding the original cost of the property, must be made within a 30-month period following the date of acquisition.
The new IRS guidance disregards the nine month period of April 1, 2020 to December 31, 2020 in determining the 30-month substantial improvement period.
Working Capital Safe Harbor Deadlines Extended
For an entity to qualify as be a Qualified Opportunity Zone Business (QOZB), no more than 5% of its assets can consist of Nonqualified Financial Property (NFP). One exception allows for a working capital safe harbor, where cash can be held in conjunction with a plan for expending that capital within a 31 month timeframe.
A QOZB in a Federally-declared disaster zone may extend this timeframe by up to 24 months. On March 31, 2020, President Trump issued an emergency declaration for all 50 states, the District of Columbia, and five territories. This effectively extended the working capital safe harbor timeline by 24 months.
QOF Reinvestment Period Extended 12 Months
When a QOF sells or disposes of QOZ property, if the QOF reinvests the proceeds into a QOZ property within a 12 month period following the sale, the proceeds are calculated as QOZ property for purposes of the 90% investment standard.
Under the IRS guidance, if January 20, 2020 falls within a QOF’s 12 month reinvestment period, that QOF is allowed up to an additional 12 months to reinvest in QOZ property.
The deadline extensions and other forms of relief provided by IRS Notice 2020-39 provide much-needed relief for investors whose QOZ purchases and improvement plans were disrupted by the COVID-19 pandemic.
For guidance on how these rules will impact your investments, please contact us for a consultation.