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August 16, 2021

IRS corrects opportunity zone regulations

On August 5, 2021, Treasury released corrections (86 FR 42716 and 86 FR 42715) (the August 2021 corrections) to the final qualified Opportunity Zone (OZ) regulations (TD 9889). The August 2021 corrections primarily address the working capital safe harbor for Qualified Opportunity Zone Businesses (QOZBs).

The August 2021 corrections are effective on August 5, 2021, and apply on or after January 13, 2020.


The IRS published final regulations (TD 9889) on OZs in January 2020 (see Tax Alert 2020-0056) and corrections (86 FR 19082) in April 2020 (see Tax Alert 2020-0992). Topics addressed in the final regulations include:

  • The types of gains that may be invested and the timing for that investment
  • When gains may be excluded from taxable income
  • How Qualified Opportunity Funds (QOFs) and QOZBs can invest in OZs
  • How C corporations can invest in OZs
  • New rules for QOF C corporations

The final regulations became effective on March 13, 2020.

IRC Section 1400Z-2 and the final regulations require businesses to meet several requirements to qualify as a QOZB. The following are two of these requirements:

  • At least 70% of a QOZB's tangible property must meet the requirements for qualified opportunity zone business property (QOZBP) (70% asset test). For tangible property to qualify as QOZBP, a QOZB generally must purchase tangible property from an unrelated party and either place the property in service in an OZ for the first time or make substantial improvements.
  • Less than 5% of the average of the aggregate unadjusted bases of a QOZB's property may be attributable to nonqualified financial property, such as stock, partnership interests and unreasonable amounts of working capital (NQFP requirement).

The final regulations include a working capital safe harbor. Under that safe harbor, a QOZB's working capital assets are treated as "reasonable in amount," and therefore not NQFP, if the QOZB: (1) has a written plan to deploy the working capital on developing a trade or business in an OZ, (2) has a written schedule to do so within 31 months, and (3) follows its written plan and schedule in a manner that is "substantially consistent." A QOZB may benefit from multiple working capital safe harbors if it receives multiple tranches of capital.

The final regulations, as updated by the April 2020 correcting amendments, give a QOZB within a working capital safe harbor flexibility in meeting the requirements of the 70% asset test. Practitioners, however, have struggled with how to interpret this flexibility, as there has been ambiguity around how a QOZB in a working capital safe harbor would satisfy the 70% asset test. The August 2021 corrections address that ambiguity.

August 2021 corrections

The August 2021 corrections permit tangible property to be treated as QOZBP for purposes of the 70% asset test if an "eligible entity" (1) has a written plan that designates working capital for expenditure on developing tangible property; and (2) expects the property will meet the QOZBP requirements as a result of that expenditure. For example, a QOZB with a written plan to expend working capital on substantially improving tangible property in an OZ may count that tangible property as QOZBP for purposes of the 70% test while the QOZB is in a working capital safe harbor, even though the property has not yet been substantially improved. The regulations broadly define "eligible entity" as a corporation or partnership that may be a QOF or QOZB.

The corrections also consider a QOZB compliant with the 70% asset test if it is a "start-up business" and meets all requirements of the working capital safe harbor. Otherwise stated, the 70% asset test is suspended while the QOZB is within a working capital safe harbor. The regulations do not, however, define the term "start-up business."

Finally, the corrections clarify that working capital can never be considered QOZBP. This means that working capital should not be factored into either the numerator or the denominator of the 70%-asset-test calculation.


The corrections' distinction between start-up QOZBs and other QOZBs creates new uncertainty because "start-up business" is not clearly defined. The consequences are significant, as some development plans might only become feasible for QOZBs that qualify as start-ups. For example, a plan to acquire land from a related party and then construct a new building might not be possible if the QOZB is subject to the 70% asset test throughout the working capital safe harbor. If the 70% asset test is suspended, however, the QOZB can undertake the project so long as the new building is placed in service and comprises at least 70% of the QOZB's total tangible property by the end of the working-capital-safe-harbor period. To the extent that a QOZB is indeed a "start-up business," the newly clarified 70%-asset-test relief is extremely favorable. These corrections may open the door for additional investment in OZs.


Contact Information
For additional information concerning this Alert, please contact:
Tax Credit Investment Advisory Services
   • Michael Bernier (
   • Rachel Weiss van Deuren (