Additional Relief to Qualified Opportunity Zone Investors Impacted by COVID-19
In early April, the IRS provided relief to taxpayers affected by the COVID-19 pandemic by postponing due dates with respect to certain taxpayer and government acts. See Notice 2020-23. Earlier this month, the IRS granted additional deadline relief for Qualified Opportunity Funds (QOFs) and their investors in response to the ongoing pandemic (Notice). See Notice 2020-39.
The Notice provides additional relief for the following requirements:
- The 180-day investment requirement,
- The 90% investment standard, and
- The 30-month substantial improvement requirement.
The Notice also confirms the availability of additional time for qualified opportunity zone (QOZ) businesses to expend capital under the 31-month working capital safe harbor and for QOFs to reinvest certain proceeds.
180-Day Investment Requirement for QOF Investors
QOZ investors are generally required to invest capital gain in a QOF within 180 days of the capital gain event to receive QOZ tax benefits.
The Notice extends this 180-day investment period until December 31, 2020, if the investor’s original 180-day period would have ended between April 1, 2020 and December 30, 2020. This extension is automatic. However, the investor is required to file Forms 8949 and 8997 with a timely filed or amended federal income tax return.
90% Investment Standard for QOFs
A QOF is usually required to hold at least 90% of its assets in QOZ property, determined by the average of the percentage of the QOZ property held by that QOF measured every 6 months.
The Notice provides that a QOF’s failure to meet the 90% investment standard where the testing date falls between April 1, 2020 and December 31, 2020 is deemed to be due to “reasonable cause”. Therefore, such failure does not disqualify the QOF, or investments into the QOF from satisfying the QOZ requirements. This relief is automatic, but the QOF must complete and timely file Form 8996.
30-Month Substantial Improvement Requirement
Property may be treated as QOZ business property if it is substantially improved by a QOF or QOZ business within a 30-month period.
The Notice permits the period from April 1, 2020 to December 31, 2020 to be disregarded in determining whether the 30-month substantial improvement requirement is satisfied.
31-Month Working Capital Safe Harbor for QOZ Businesses
The QOZ regulations currently provide a QOZ business a 31-month safe harbor for treating working capital as “reasonable” for purposes of Section 1397C(e). This 31-month period may be extended to a maximum of 62 months if certain requirements are met. In addition, if the QOZ business is located in a QOZ within a federally declared disaster, the QOZ business may receive not more than an additional 24 months to expend its working capital assets. Therefore, a QOZ business may have a maximum of 86 months to expend working capital assets under certain circumstances.
Due to the federally declared disaster declared by the President on March 13, 2020, the Notice confirms that all QOZ businesses qualify for the 24-month extension.
QOF Reinvestment Period for QOFs
Under the QOZ regulations, a QOF has 12 months to reinvest “proceeds from the return of capital or the sale or disposition of some or all of its QOZ property”. If the planned reinvestment is delayed due to a federally declared disaster, then the QOZ regulations provide an additional 12 months for the QOF to reinvest such proceeds.
The Notice confirms that the 12-month extension would be available to all QOFs so long as the original reinvestment period included January 20, 2020, which is the disaster date identified in the Presidential declaration.
This additional relief is welcomed news to QOZ investors and QOFs because it clarifies the application of the existing relief under the QOZ regulations and it provides new relief regarding the 90% investment standard and the substantial improvement requirement. This relief will help QOZ investors and QOFs continue to invest in low-income communities throughout the United States. As QOZ projects continue to move forward, QOZ investors and QOFs should keep in mind that this relief will affect current and future transactions so they should consult their tax advisors to fully understand how their specific transactions are impacted.
The information contained in this publication should not be construed as legal or medical advice, is not a substitute for legal counsel or medical consultation, and should not be relied on as such.
