IRS announces extensions and other tax relief for qualified opportunity funds (QOF) and investors affected by COVID-19
On June 4, 2020, the IRS released Notice 2020-39, which provides guidance and relief for qualified opportunity funds (QOFs) and their investors in light of the COVID-19 pandemic.
QOFs and QOF investors must abide by numerous complex and time-sensitive provisions to comply with the opportunity zone tax rules set forth in the Internal Revenue Code and the regulations thereunder. In issuing Notice 2020-39, the IRS has extended certain time-sensitive requirements and suspended others to help taxpayers during the coronavirus crisis.
180-day investment requirement for QOF investors postponed to Dec. 31, 2020
Taxpayers wanting to defer eligible gain by investing in a QOF are generally required to make their QOF investment within 180 days of realizing the eligible gain. Earlier this year, IRS Notice 2020-23 postponed to July 15, 2020, any deadline of a 180-day investment requirement that would have fallen on or after April 1, 2020, and before July 15, 2020. The IRS has now further postponed the 180-day investment period to Dec. 31, 2020, for any 180-day investment requirement deadline that falls on or after April 1, 2020 and before Dec. 31, 2020.
Although this relief is automatic, taxpayers must still make a valid deferral election and file completed Forms 8949 and 8997 with their timely filed tax returns (including extensions) for the taxable year in which the gain would be recognized.
Penalty for failing 90-percent investment standard suspended through Dec. 31, 2020
A QOF must hold at least 90 percent of its assets in qualified opportunity zone business property by certain measurements taken on semiannual testing dates, or else be subject to penalty. However, no penalty is assessed if the QOF fails the semiannual testing due to reasonable cause. Notice 2020-39 extends reasonable cause status to a QOF’s failure to meet the 90-percent investment standard on any semiannual testing dates from April 1, 2020 through Dec. 31, 2020. Therefore, QOFs will not be subject to penalty for failing to meet the standard during this period.
30-month substantial improvement period suspended through Dec. 31, 2020
Generally, one requirement necessary for tangible property to be considered qualified opportunity zone business property is that either: 1) the original use of post-2017 property must begin with the QOF (original use requirement) or 2) the QOF must substantially improve the property (substantial improvement requirement). To fulfill the substantial improvement requirement, certain additions must be made to the basis of the property within 30 months of acquiring the property. Notice 2020-39 suspends the period from April 1, 2020, through Dec. 31, 2020, for purposes of the 30-month substantial improvement period.
Regulatory extensions: Working capital safe harbor and QOF reinvestment period
Notice 2020-39 also reminds taxpayers of two regulatory extensions: an additional 24-month extension for the working capital safe harbor and 12-month extension for the QOF reinvestment period.
Qualified opportunity zone businesses are restricted from holding more than a certain amount of working capital. A safe harbor is provided whereby entities may hold certain working capital without violating the restriction if certain conditions regarding the character and intended use of the working capital are met. Notice 2020-39 reminds taxpayers that they have up to an additional 24 months to expend these assets so long as the other safe harbor requirements are met.
QOFs have a limited amount of time to reinvest amounts received from certain distributions of QOF stock, returns of capital of QOF partnership interests, or other realized sales proceeds. Notice 2020-39 reminds QOFs that should any reinvestment period include Jan. 20, 2020, then the QOF has an additional 12 months to reinvest those amounts into qualified opportunity zone property.
Patrick Duffany, JD, CPA, Managing Partner, Tax
Brian Newman, CPA, Partner, Practice Leader, Federal Tax Services
Ira Weinstein, Managing Principal, Real Estate, Cannabis
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