The IRS and Treasury have released new guidance, Notice 2020-39, providing further relief for Opportunity Zone funds and their investors. Previously, in Notice 2020-23, issued in April, the government provided broad relief for taxpayers by automatically extending to July 15, 2020 the deadlines for performing “tax sensitive” acts that were due on or after April 1, 2020 and before July 15, 2020. For investors considering an OZ fund investment, this means that if the investor’s original 180-day deadline under Internal Revenue Code Section 1400Z-2(a)(1)(A) for investing capital gains into an OZ fund would have occurred on or after April 1, 2020 but before July 15, 2020, then that deadline is automatically extended until July 15, 2020.
Now, in response to comments from various industry groups, even more extensive relief has been provided exclusively for OZ funds and their investors. Here are the specific types of relief provided in the new guidance:
- 180-Day Investment Rule. Under IRC Section 1400Z-2(a)(1), taxpayers must invest capital gains into a Qualified Opportunity Zone (“QOZ”) Fund within a 180-day period to qualify for the OZ program benefits. Supplementing Notice 2020-23, the Notice provides that the 180-day period to invest in a QOZ Fund is extended automatically for those taxpayers whose investment deadline falls on or after April 1, 2020 and before December 31, 2020 until December 31, 2020.
Although the extension is automatic, taxpayers must still make a valid deferral election using IRS Form 8949, complete IRS Form 8997, and file those forms with a timely filed federal income tax return (including extensions) or an amended federal income tax return for the taxable year in which the gain would be recognized if IRC Section 1400Z-2(a)(1) did not apply.
- 90% Asset Testing Dates. A QOZ Fund must hold at least 90% of its assets in QOZ property, as determined by averaging the percentage of QOZ property held on two semi-annual testing dates each year. Pursuant to the Notice, for a QOZ Fund that fails to meet that standard on any of the two testing dates which fall within the period beginning on April 1, 2020 and ending on December 31, 2020, that failure is automatically considered to be due to reasonable cause and further is also disregarded for determining whether the QOZ Fund or any investments in that QOZ Fund satisfy the requirements of IRC Section 1400Z-2 or Treasury Regulation Section 1.1400Z-2 for any taxable year of the QOZ Fund.
Although the relief is automatic, the QOZ Fund must accurately complete all lines on the IRS Form 8996 filed with respect to each affected taxable year except that the QOZ Fund should place a “0” in Part IV, Line 8 (Penalty).
- 30-Month Substantial Improvement Requirement. If QOZ property held by a QOZ Fund is not put to its original use in an opportunity zone, then the QOZ Fund must “substantially improve” that property during any 30-month period beginning after the date of its acquisition. The Notice tolls the 30-month substantial improvement period during the period beginning on April 1, 2020 and ending on December 31, 2020.
- Working Capital Safe Harbor. The OZ regulations have created an additional 62-month safe harbor for start-up businesses to ensure that they can comply with the 70% tangible property standard, the 50% gross income requirement, and other requirements to qualify as a QOZ business. The regulations also provide that a QOZ business can receive an extra 24 months to use their working capital if the OZ is in a federally declared disaster area. The Notice verifies that due to the pandemic emergency declaration, all QOZ businesses holding working capital assets intended to be covered by the working capital safe harbor before December 31, 2020 receive a period of not more than an additional 24 months to expend the working capital assets.
- 12 Month Reinvestment Period. Under the QOZ regulations, if a QOZ Fund receives proceeds from a return of capital or the sale of some or all of the QOZ Fund’s QOZ property, those proceeds must be reinvested within 12 months for purposes of the 90% asset test. The Notice clarifies that if a QOZ Fund has a 12-month reinvestment period that includes January 20, 2020 (the date of the disaster identified in the pandemic disaster declarations), then it has up to an additional 12 months to reinvest the proceeds in QOZ property.
These extensions should help QOZ Funds and their investors meet the requirements of the OZ rules by giving them a significant amount of additional time and flexibility. This demonstration of the administration’s strong commitment to developing opportunity zones may also give potential investors more confidence in making the decision to invest in a QOZ Fund.
Visit our Opportunity Zone Education Center to learn more and find out how JTC Americas can help your business.