In IRS Notice 2020-39, released June 4, 2020, the IRS offered multiple types of relief for Qualified Opportunity Funds (QOFs) and their investors, in response to the disruption caused by the COVID pandemic. This flexibility is in line with extensions that have been granted to similar time sensitive tax issues (including QOFs), as discussed in our previous alert. The relief in Notice 2020-39 is divided into two main categories, grants of relief and regulatory extensions. The provisions within these categories are discussed in turn below.
Grants of relief for QOF investors and QOFs
A. 180-Day investment requirement for QOF investors – If the last day of a taxpayer’s 180-day investment period for making a QOF investment falls on or after April 1, 2020 and before Dec. 31, 2020, then the last day of the 180-day period to invest is postponed until Dec. 31, 2020. This extends an investor’s time to make a qualifying investment until the end of this year if their 180-day window would have otherwise required investment to occur any day within calendar year 2020. This relief is automatic, and no action is required on the part of the taxpayer other than the regularly required deferral elections on Form 8949 and the filing requirements of Form 8997 in relation to that deferred gain.
B. 90% investment standard – If a QOF fails the 90% test in 2020, the failure is automatically considered to be due to reasonable cause under section 1400Z-2(f)(3), and the QOF would not have to pay the normally applicable penalty. However, the QOF still needs to accurately complete Form 8996, which reports the results of their compliance testing. As above, this relief is automatic and no action is required on the part of the taxpayer other than the regularly required Form 8996 filing.
C. Substantial improvement – The period April 1, 2020 through Dec. 31, 2020 is disregarded in determining any 30-month substantial improvement period. This means if the project was started prior to April 1, 2020, a QOF or QOZ business (QOZB) actually will have 39 months to substantially improve the property. This is only applicable if the QOF or QOZB has acquired an existing building that has been placed in service.
Regulatory extensions for working capital safe harbor and QOF reinvestment period due to federally declared disasters
A. Working capital safe harbor – All QOZBs that were holding working capital assets before Dec. 31, 2020 that are covered by the working capital safe harbor receive an additional 24 months to expend working capital assets of the QOZB. In order to benefit, the QOZB will have to meet the previously established requirements of the working capital safe harbor under 1.1400Z2(d)-1(d)(3)(v). The notice also mentions in its general discussion that a project’s cumulative working capital safe harbor can be extended to 86 months for a QOZB in a Federally declared disaster area if the requirements of both 1.1400Z2(d)-1(d)(3)(v) and (vi) are met.
B. Reinvestment period for QOFs – QOFs that received return of capital or liquidating proceeds from the sale or disposition of qualified opportunity zone property and were relying on the 12 month reinvestment period as of Jan. 20, 2020 will receive an additional 12 months to reinvest in QOZ property. In order to benefit from this relief the QOF has to satisfy the requirements of the reinvestment rules which generally requires they reinvest the proceeds into QOZ property and continuously be held in cash, cash equivalents, or debt instruments with a term of 18 months or less.
Although taxpayers now have more flexibility in their QOF investments, they should still carefully consider all applicable rules and discuss the project with their tax adviser before making any decisions regarding these extensions, safe harbors, or Qualified Opportunity Zones in general.