The opportunity zone program was enacted by Congress as part of the Tax Cuts and Jobs Act in 2017. It was designed to incentivize investment and drive economic growth in qualifying distressed communities. Congress encouraged investors by offering substantial tax benefits, such as deferral and stepped-up basis, to those who invest in qualified opportunity zones through a qualified opportunity fund (“QOF”).
The Treasury Department and IRS released two tranches of regulations in April 2019 and December 2019. The final regulations are intended to provide certainty to investors considering creating or investing in a QOF.
In response to COVID-19, on April 9, 2020 the IRS released guidance extending certain tax related deadlines, including extending until July 15 the 180 day period during which an opportunity zone investor has to invest in a QOF, if, prior to the extension, the investor’s 180 day period was to expire between April 1 and July 14.
Most recently, on June 4 the IRS published Notice 2020-39, which contains relief and provides flexibility to QOFs and their investors amidst the ongoing COVID-19 pandemic. Notable provisions include:
1. 180 Day Contribution Period Extended.
Prior to Notice 2020-39, a taxpayer who sold property for an eligible capital gain generally had 180 days to contribute all or a portion of that capital gain in a QOF. Now, if a taxpayer’s 180-day contribution period was set to expire between April 1, 2020 and December 30, 2020, the contribution period is automatically extended to December 31, 2020.
2. 90% Asset Test Temporarily Relaxed.
A QOF is required to hold at least 90% of its assets in qualified opportunity zone property. Generally, failure to meet the 90% threshold results in a monetary penalty for each month the QOF fails to meet the 90% threshold.
The new guidance relaxes this standard temporarily. Specifically, if a QOF fails to meet the 90% asset test on any of the QOF’s testing dates which fall between April 1, 2020 and December 31, 2020, the entity will not fail to qualify as a QOF and will not be subject to the generally applicable statutory penalties.
3. Working Capital Safe Harbor Extension.
As a result of the asset tests within the opportunity zone program, a QOF can generally hold only insignificant amounts of cash on hand. However, by meeting certain requirements, a QOF, through a subsidiary, can hold working capital without violating the 90% asset test for 31 months, provided the QOF remains otherwise qualified.
Notice 2020-39 automatically extends this 31-month period to 55 months (approximately 4.5 years), so long as the QOF qualified for the safe harbor before December 31, 2020 and the QOF is located in a federally declared disaster area. As a result of President Trump’s March 12, 2020 coronavirus emergency declaration, all qualified opportunity zones qualify as federally declared disaster areas.
4. Substantial Improvement Requirement Extended.
Generally, a QOF must substantially improve property it acquires within 30 months of acquisition unless the original use of that property commenced with the QOF.
Under the new guidance, a QOF can disregard the period of April 1, 2020 through December 31, 2020 when calculating their substantial improvement period. In effect, a QOF may tack on 9 months to its substantial improvement period.
Rose Law Group is committed to helping you stay informed and up to date on current legal developments arising out of the COVID-19 pandemic. If you have any questions regarding new IRS guidance, Dan Gauthier can be reached at Dgauthier@roselawgroup.com.