Article written by:
Azra Nakicevic, CPA
Director, Tax & Business Advisory Services
Lorani Orobitg, CPA
Manager, Tax & Business Advisory Services
On June 4, 2020, the IRS provided guidance for Qualified Opportunity Funds (QOF) and their investors in response to the ongoing COVID-19 pandemic by issuing Notice 2020-39.
Notice 2020-39 extends certain deadlines related to investors’ reinvestment period, 30-month substantial improvement period, and working capital safe harbor period. It also addresses the application of certain relief provisions in the regulations under §1400Z-2 of the Code (opportunity zones regulations) as a result of the ongoing COVID-19 crisis.
Extension of 180-Day Investment Requirement for QOF Investors
Taxpayers who sold property for an eligible gain are generally required to reinvest the gain in a Qualified Opportunity Zone (QOZ) within 180 days from the date of the sale. Notice 2020-39 provides relief by stating that if the last day of the 180-day investment period within which a taxpayer must make an investment in a QOF falls on or after April 1, 2020, and before December 31, 2020, the last day of that 180- day investment period is postponed to December 31, 2020. This relief is automatic. However, a taxpayer will still need to make a valid deferral election in accordance with the instructions to Form 8949. They will need to complete Form 8997, and file the completed Form 8949 and Form 8997 with a timely filed Federal income tax return (including extensions), or amended Federal income tax return. The Federal return is for the taxable year in which the gain would be recognized if §1400Z-2(a)(1) did not apply to defer recognition of the gain. This extends the relief for the 180-day reinvestment period that was previously provided until July 15, 2020.
Relief from penalty if 90-Percent Investment Standard for QOFs is not met
Under Notice 2020-39, a QOF’s failure to hold more than 90% of its assets in QOZ property on any semi-annual testing dates from April 1, 2020, through December 31, 2020, is deemed to be due to reasonable cause (COVID-19) under §1400Z-2(f)(3), and as such, the QOF will not be liable for the statutory penalty due to such failure during this period. This relief is automatic. However, a QOF must accurately complete all lines on Form 8996 filed with respect to each affected taxable year EXCEPT that the QOF should place a “0” in Part IV, Line 8 (Penalty). The accurately completed Form 8996 must be filed with the QOF’s timely filed Federal income tax return (including extensions) for the affected taxable year(s).
Extension of the 30-Month Substantial Improvement Period for QOFs and QOZ Businesses
For purposes of the substantial improvement requirement with respect to property held by a QOF or QOZ business, the period beginning on April 1, 2020, and ending on December 31, 2020, is disregarded in determining any 30-month substantial improvement period. In other words, the 30-month substantial improvement period is tolled during the period beginning on April 1, 2020, and ending on December 31, 2020.
Extension of the 12-Month Reinvestment Period for QOFs
If any QOF’s 12-month reinvestment period includes January 20, 2020 (that is, the date of the disaster identified in the Major Disaster Declarations), the QOF receives up to an additional 12 months to reinvest in qualified opportunity zone property, some or all of the proceeds received by the QOF from the return of capital, or the sale or disposition of some or all of the QOF’s QOZ property, provided that the QOF satisfies the requirements of §1.1400Z2(f)-1(b)(1) and invests the proceeds in the manner originally intended before January 20, 2020
Reminder of the 24-Month Extension for the Working Capital Safe Harbor
For QOZ business projects that meet the requirements of the 31-month working capital safe harbor under the final regulations, the notice reminds taxpayers that due to the COVID-19 pandemic these projects have up to an additional 24 months in which to expend their working capital.
These provisions are welcome response and clarification of the final regulations and should help investors and funds navigate delays in deploying their capital as a result of Covid-19. For more information, visit the IRS’ updated Opportunity Zones Frequently Asked Questions page.