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The COVID-19 pandemic has resulted in the extension of certain deadlines that are relevant for qualified opportunity zone (OZ) investors and businesses.

First, in Notice 2020-23, the IRS extended, for certain investors, the 180-day deadline for investing in a qualified opportunity fund (QOF), as well as the deadline for certain OZ filings.

Second, as of April 11, 2020, President Trump approved major disaster declarations for all 50 states, the District of Columbia and U.S. territories (except for American Samoa), thereby granting QOFs additional time to reinvest certain proceeds into OZs and qualified opportunity zones businesses (QOZBs) additional time to spend working capital in OZs.

QOFs and QOZBs may now be able to benefit from additional time to deploy capital and execute on projects in OZs. For QOZBs, the Preamble to the final regulations indicates that there must be a connection between project delays and the federally declared disaster.

Extra time for QOF investment and certain elections

Under IRC Section 1400Z-2, OZ investors must invest capital gain in a QOF within a 180-day window to receive any OZ tax benefits. This 180-day window generally begins on the date of the sale or exchange resulting in the generation of capital gain. Under Notice 2020-23, an OZ investor whose 180-day window for investment would expire any time from April 1, 2020 through July 14, 2020, has until July 15, 2020, to invest into a QOF.

Additionally, Notice 2020-23 extends the deadline for most federal tax filings to July 15, 2020 (see Tax Alert 2020-0961), including the deadlines for elections that must be made on such filings or related attachments. Consequently, the deadline for making OZ elections that are typically made as part of a timely filed tax return is also extended, such as an election to consolidate a subsidiary QOF C corporation or an election to treat the investment of one member in a consolidated group as a qualifying investment by another member. Elections required under the final regulations (TD 9889, see Tax Alert 2020-0056) that are not included in a regularly filed tax return, such those around consolidation of a previous unconsolidated QOF, are not extended.

Implications

These deadline extensions should give taxpayers increased flexibility for making OZ investments and complying with requirements set forth in IRC 1400Z-2 and the final regulations. In particular, the extended 180-day investment window may allow taxpayers that have recently realized capital gains additional time to evaluate OZ projects and their own financial needs before committing to long-term OZ investments.

Extra time to reinvest proceeds, deploy capital

Under the final regulations, a QOF has a 12-month window to reinvest proceeds from the sale or disposition of equity in QOZBs or direct holdings of tangible property meeting the requirements to be qualified opportunity zone business property. If a QOF's plans for reinvestment are delayed "due to a Federally declared disaster," then the QOF may benefit from an additional 12 months to reinvest so long as the QOF ultimately proceeds in accordance with its original reinvestment plan.

Additionally, under the final regulations, a QOZB can benefit from a "working capital safe harbor," which allows it up to 31 months or 62 months (if there are multiple capital infusions) to deploy working capital assets into an OZ and fully comply with certain QOZB requirements. Working capital assets under the safe harbor are reasonable amounts of working capital, cash equivalents, or debt instruments with a term of 18 months or less that the QOZB has designated for expenditure on developing a trade or business in an OZ within 31 months of receipt. If a QOZB is located in an OZ "within a Federally declared disaster," the final regulations grant the QOZB an additional 24 months to deploy its working capital in line with the business plan under the working capital safe harbor. As of April 11, 2020, President Trump approved major disaster declarations for all 50 states, the District of Columbia, and U.S. territories (except for American Samoa) regarding the COVID-19 pandemic.

Implications

There was no formal time extension for QOFs that are attempting to deploy non-reinvestment funds into a QOZB. This is likely due to the fact that the final regulations allowed for a delayed deployment under a reasonable-cause exception. While QOFs would have appreciated a safe harbor or further definition of what constitutes reasonable cause, it is logical that a QOF that is actively pursuing transactions and has the execution delayed due to COVID-19 would be eligible to apply the reasonable-cause exception.

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