What You Need to Know about Additional Opportunity Zone Relief Available due to COVID-19 PandemicAnchin AlertJune 5, 2020
Qualified Opportunity Funds (“QOF”) and their investors have been working diligently to try and meet certain time-sensitive deadlines in order to comply with various Opportunity Zone rules. Due to the COVID-19 pandemic and the quarantine restrictions instituted by local governments, meeting these deadlines has been challenging, if not impossible. The Internal Revenue Service has released Notice 2020-39 (“the Notice”) providing much-needed relief for QOFs and their investors. The Notice provides relief for the 180 day investment requirement for QOF Investors, the 90 percent investment standard for QOFs, and the 30 month substantial improvement period. The Notice also confirms the 24-month extension of the working capital safe harbor and the 12-month extension for QOFs to reinvest certain proceeds. Below is a brief introduction to each of the requirements and the relief outlined in the Notice.
180 Day Investment Requirement for QOF Investors
Generally, a taxpayer has 180 days from the date of a gain, from the sale or exchange of any property with an unrelated person, to invest the proceeds of the gain into a QOF. If the taxpayer makes such investment, they may make an election to exclude from gross income the amount invested into the QOF.
If an investor’s 180-day period to invest proceeds from a gain into a QOF ends 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, the taxpayer still needs to make a valid deferral election in accordance with the instructions to Form 8949, complete Form 8997, and file the completed Form 8949 and Form 8997 with a timely filed tax return, including extensions; or file an amended return for the taxable year the gain would have been recognized if the qualified opportunity zone did not defer the gain recognition.
90 Percent Investment Standard for QOFs
A QOF is any investment vehicle organized as a corporation or partnership for the purpose of investing in qualified opportunity zone property (other than another QOF). This definition also requires a QOF to hold at least 90 percent of its assets in qualified opportunity zone property, determined by the average of the percentage of qualified opportunity zone property held by that QOF on the last day of the first six-month period of the taxable year of the QOF, and on the last day of the taxable year of the QOF.
In the case of a QOF that has a last day of the first six-month period or last day of the taxable year that falls within the period beginning on April 1, 2020, and ending on December 31, 2020, any failure by that QOF to satisfy the 90 percent investment standard for that taxable year of the QOF is due to reasonable cause and disregarded for purpose of determining whether the QOF or any otherwise qualifying investments in that QOF satisfy the requirements to be a QOF.
This relief is automatic. The QOF must still accurately complete Form 8996 for the tax year except that the QOF should place a “0” in Part IV, Line 8 (the penalty line).
30 Month Substantial improvement Period for QOFs and Qualified Opportunity Zone Businesses (“QOZB”)
Tangible property is treated as qualified opportunity zone business property if the tangible property is used in a trade or business of the QOF and satisfies three general requirements. One of those requirements is that the original use of post-2017 acquired tangible property must begin with the QOF, or the QOF must substantially improve that property. The substantial improvement requirement is met only if, within a 30-month period beginning on the date of acquisition of the acquired tangible property, improvements are made to the property in excess of the original cost of the tangible property.
The Notice provides for the purpose of the substantial improvement requirement with respect to the property held by a QOF or QOZB, the period beginning on April 1, 2020 and ending on December 31, 2020 is disregarded in determining any 30-month substantial improvement period.
Working Capital Safe Harbor for Qualified Opportunity Zone Businesses
In order for an entity to be a QOZB, no more than 5% of its assets can consist of Nonqualified Financial Property (“NFP”). NFP is defined to include debt, stock, partnership interests, options, future contracts, warrants, notional principal contracts, and other financial instruments. One exception of NFP is a reasonable amount of working capital held in cash, cash equivalents or debt instruments with a term of 18 months or less. The Opportunity Zone regulations allow QOZBs a working capital safe harbor. One of the requirements of this working capital safe harbor is that there is a written schedule consistent with the ordinary startup of a trade or business for expenditures of the working capital assets within 31 months of receipt of the assets by the business. It is possible to extend the working capital safe harbor to 62 months in certain instances.
If a QOZB is located in a qualified opportunity zone within a Federally declared disaster area, the QOZB may receive not more than an additional 24 months to expend its working capital assets.
On March 13, 2020, the President of the United States issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Act in response to the COVID-19 pandemic. Subsequent to the emergency declaration, the President issued major disaster declarations under the Stafford Act with respect to all 50 states, the District of Columbia and five territories. As a result of the Emergency Declaration, all QOZBs holding working capital assets intended to be covered by the working capital safe harbor before December 31, 2020 receive not more than an additional 24 months to expend their working capital assets.
12 Month Reinvestment Period for QOFs
Generally, if a QOF sells or disposes of some or all of its qualified opportunity zone property or if a distribution with respect to a QOF’s qualified opportunity zone stock is treated as a return of capital hands and the QOF reinvests the proceeds in qualified opportunity zone property by the last day of the 12-month period beginning on the date of the distribution, sale, or disposition, the proceeds are treated as qualified opportunity zone property for purposes of the 90 percent investment standard. The proceeds must continuously be held in cash, cash equivalents, or debt instruments with a term of 18 months or less.
If January 20, 2020 falls within a QOF’s 12 month reinvestment period, that 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 opportunity zone property.
Please contact your Anchin Relationship Partner or any member of Anchin’s Opportunity Zone Practice if you have questions. We stand ready to help you plan effectively and to navigate through these rules and reporting requirements. In the meantime, we will continue to update you as more information becomes available.
Disclaimer: Please note this is based on the information that is currently available and is subject to change.