COVID-19 Impacts on Opportunity Zone Investment Requirements

CLIENT ALERT

By: Peter Beach

June 17, 2020

The 2017 tax law created capital gains tax breaks for investors who invest profits from stocks, bonds, and other assets into funds that finance projects in any designated opportunity zone (“OZ”). On June 5, 2020, the IRS issued Notice 2020-39 (the “Notice”), granting relief to qualified opportunity funds (“QOF”s) and their investors from some of the OZ program’s time-sensitive requirements.

  • 180-day investment period extended. Investors are granted an additional automatic extension of the 180-day period in which they must acquire a QOF interest in exchange for the OZ tax benefits. Taxpayers now have until December 31, 2020, to invest if their 180-day period otherwise would have ended on or after April 1, 2020, and before December 31, 2020.
  • Failure to comply with the 90% test may be disregarded. The Notice provides that under certain circumstances, a QOF’s failure to comply with the 90% asset test will be disregarded. Under the Notice, a QOF that fails to meet the 90% test will automatically be deemed to have reasonable cause for such failure if the last day of the first six-month period of its taxable year or the last day of its taxable year falls between April 1, 2020, and December 31, 2020. If these requirements are met, the failure will be disregarded in determining whether the QOF is compliant with the program’s rules, meaning that no penalties will be assessed.
  • The 30-month substantial improvement period is extended. A QOF or qualified opportunity zone business (QOZB) that purchases non-original use property must “substantially improve” the property for it to be qualified opportunity zone business property (QOZBP). Substantial improvement requires, generally, that an amount exceeding the QOF’s or QOZB’s purchase price be spent improving the property within any 30-month period beginning after the date of acquisition of the property. The Notice automatically disregards the period beginning on April 1, 2020, and ending on December 31, 2020 (the “Tolling Period”) in determining any 30-month substantial improvement period. This, in effect, treats January 1, 2021, as the first day of any 30-month substantial improvement period that begins during the Tolling Period.
  • Extensions of working capital safe harbor and 12-month reinvestment period confirmed. Delays caused by the impact of the Covid-19 pandemic have made it difficult for OZ projects to satisfy certain deadlines under the OZ rules. Notice 2020-39 confirms that as a result of the federal disaster declarations effective as of January 20, 2020 (the “Federal Disaster Declarations”), all OZ census tracts are federally declared disaster areas so that extensions under the working capital safe harbor and 12-month reinvestment period rules will apply.

          Working capital safe harbor. The OZ rules provide a safe harbor to ensure that working capital reserves are not treated as non-qualified financial property, which could cause the business to fail to qualify as a QOZB. To qualify for this safe harbor, among other things, the business must develop the project in accordance with a working capital plan that is projected to be completed within 31 months, subject to an extension of an additional 31 months under certain circumstances. The OZ rules already provide that the working capital period may be extended for an additional 24 months if the project is located in a federally declared disaster area. Notice 2020-39 confirms that as a result of the Federal Disaster Declarations, all OZ census tracts are federally declared disaster areas, and thus all QOZBs are entitled to an additional 24 months to expend working capital assets subject to the working capital safe harbor, resulting in a working capital period in some cases of up to 86 months.

          12-month reinvestment period. If a QOF sells or disposes of its interest in a QOZB, or receives a return of capital with respect to such interest, and reinvests the proceeds in another QOZB within 12 months from the receipt of the proceeds, the proceeds are treated as qualified opportunity zone property, provided certain other requirements are met. Under the OZ rules, if the plan to reinvest the proceeds is delayed due to a federally declared disaster, the QOF has an additional 12 months within which to reinvest the proceeds in the manner originally intended. Notice 2020-39 confirms that as a result of the Federal Disaster Declarations, if a QOF’s 12-month reinvestment period includes January 20, 2020, the QOF has an additional 12 months to reinvest, subject to the other original requirements.