June 5, 2020 Qualified Opportunity Zone funds and investors get more relief from deadlines In Notice 2020-39, the IRS grants deadline relief for qualified Opportunity Zone (OZ) investors and Qualified Opportunity Funds (QOFs) in response to the COVID-19 pandemic. Extended deadlines apply to the 180-day investment window, the 30-month substantial improvement requirement, and the 90% investment standard requirement, as well as the additional time for Qualified Opportunity Zone Businesses (QOZBs) to expend capital under the working capital safe harbor and for QOFs to reinvest certain proceeds under the Opportunity Zone regulations (TD-9889) (see Tax Alerts 2020-0056, 2020-0992). In addition, the OZ FAQs were updated to account for the clarification of the final regulations and Notice 2020-39. 180-day investment window Under IRC Section 1400Z-2(a), 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. Notice 2020-39 extends the investment window by providing that investors have until December 31, 2020, to invest eligible gains into QOFs if the original 180-day window for investment would have ended any time from April 1, 2020 through December 30, 2020. Although the extension is automatic, taxpayers are still required to file Forms 8949 and 8997 with a timely filed or amended federal income tax return (as extended in Notice 2020-23 (see Tax Alert 2020-0961)). This extends the relief for the 180-day window originally granted in Notice 2020-23 (see Tax Alert 2020-1041). 30-month substantial improvement requirement Under IRC Section 1400Z-2(d)(2), property can be treated as qualified opportunity zone business property if it is substantially improved by a QOF or QOZB within a 30-month period upon acquisition. Notice 2020-39 disregards the period beginning on April 1, 2020, and ending on December 31, 2020, in counting the 30-month period for substantial improvement. 90% investment standard Under IRC Section 1400Z-2(d)(1), a QOF must hold at least 90% of its assets in qualified opportunity zone property (QOZP), determined by averaging the percentage (1) on the last day of the first six-month period of the QOF's tax year and (2) on the last day of the QOF's tax year. Notice 2020-39 provides for automatic relief so that if a QOF has a 90% investment standard test date falling between the period starting on April 1, 2020, and ending on December 31, 2020, and the QOF fails to meet the 90% investment standard, such failure is deemed to be due to "reasonable cause" and does not disqualify the QOF, or investments into the QOF, under IRC Section 1400Z-2. As a result, no penalties are owed, but the QOF must still complete and file Form 8996 with a timely filed federal income tax return (as extended in Notice 2020-23). QOF reinvestment and working capital safe harbor Under the IRC Section 1400Z-2 regulations, if a QOF's plans to reinvest "proceeds from the return of capital or the sale or disposition of some or all of its qualified opportunity zone property" 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 and has continuously held the proceeds in cash, cash equivalents, or debt instruments with a term of 18 months or less. In addition, 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 its business plan under the working capital safe harbor. Notice 2020-39 confirms that, as a result of the declaration of a federally declared disaster in all OZs, the final regulations' provision allowing a 24-month extension for the working capital safe harbor for QOZBs applies to all QOZBs that otherwise qualify. Additionally, the 12-month extension for QOFs to reinvest certain proceeds applies to all QOFs that otherwise qualify so long as the original reinvestment period included January 20, 2020 (the date of the disaster identified in the federal declarations). Implications For OZ investors and QOFs that are attempting to deploy qualified capital gains into OZs, Notice 2020-39 clarifies the relief already provided under the IRC Section 1400Z-2 regulations, as well as this new relief in the form of deadline extensions for investing into QOFs and improving OZ property. These provisions are a welcome response to taxpayer and commentator requests for relief due to the COVID-19 pandemic and should help facilitate OZ investments. QOFs should be mindful that although the relief for failing the 90% investment standard is automatic, the Notice requires that QOFs must still "accurately complete all lines on Form 8996." Also, the additional 12 months to reinvest certain proceeds into QOZP is only available to QOFs that previously received proceeds from the return of capital or the sale or disposition of QOZP. QOFs receiving such proceeds after January 20, 2020, will not receive the benefit of the additional 12 months for reinvestment. Taxpayers should consult with their tax advisors and preparers regarding how the extensions will affect past or future transactions. ———————————————
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