IRS Issues Additional Relief for Opportunity Zone Investors
The fallout of COVID-19 continues to strain the investment community, and Qualified Opportunity Zones (QOZs) are no exception. The IRS provided initial relief for the QOZ community in April, extending (for many investors) the 180-day period to invest capital gains until July 15, 2020. This week, the IRS provided additional relief for QOZ investors, Qualified Opportunity Funds, and Qualified Opportunity Zone Businesses by issuing Notice 2020-39, which further relaxes some of the timeline constraints within the QOZ program.
Key provisions include:
- 180-day investment requirement for QOF investors:
A taxpayer is generally given 180 days to invest a qualified gain into a QOF. In April’s guidance, the IRS extended this reinvestment period for some taxpayers until July 15, 2020. This week’s guidance further extends the reinvestment period. Where the original reinvestment period is set to expire between April 1, 2020, and Dec. 31, 2020, such reinvestment period is now automatically extended to Dec. 31, 2020.
This will give many investors additional time to source QOZ investments and will come as welcome relief to those with an expiring reinvestment window.
- 90% investment standard for QOFs:
A QOF is required to hold at least 90% of its assets in qualified opportunity zone property (QOZP). This is determined by taking the average percentage of QOZP held by the QOF on the last day of the first six-month period of the QOF’s taxable year and on the last day of its taxable year. Notice 2020-39 states that the IRS will automatically ignore a QOF’s failure to meet its 90% investment standard test for QOFs whose last day of the first six-month period of the taxable year or whose last day of taxable year falls between April 1, 2020, and Dec. 31, 2020
This provision alleviates the need for many QOFs to maintain the 90% test for the testing date of June 30, 2020.
- 30-Month Substantial Improvement Period for QOFs and QOZBs:
Notice 2020-39 permits QOFs and QOZBs to disregard the months between April 1, 2020, and December 31, 2020, in counting toward the 30-month substantial improvement timeline.
Impact of emergency declaration:
Every population census tract that has been designated by the IRS as a QOZ is covered by a Major Disaster Declaration and is considered to have a major disaster as of Jan. 20, 2020. The following are clarifications issued by Notice 2020-39 on how this interacts with guidance already in QOZ legislation.
- QOZB working capital safe harbor:
QOZBs are allowed a 31-month working capital safe harbor that allows them to treat working capital assets as “reasonable” and not cause them to fail their 90% asset test. Notice 2020-39 confirms that all QOZBs that intended to utilize the 31-month working capital safe harbor before Dec. 31, 2020, will receive up to additional 24 months to expend the working capital
This is a key extension for QOFs, specifically those with QOZBs that have been affected by COVID-19. It is still unclear whether a QOF is automatically entitled to the full 24 months, or if some level of verification will be required to support the relief period.
- 12-month reinvestment period for QOFs:
A QOF that had a return of capital or sale or disposition of QOZP is allowed a 12-month reinvestment period in which the proceeds can continue to qualify toward the 90% test if they are re-invested in other QOZPs by the end of the 12 months. Notice 2020-39 allows up to an additional 12 months to get the proceeds reinvested without negatively affecting the QOFs 90% investment standard test.
Please reach out to your KSM advisor to determine how these changes may be relevant for your situation.
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