In response to the the COVID-19 pandemic, the government released guidance (Notice 2020-39) on June 4, 2020, providing certain relief for Opportunity Zone investors. This relief comes in the form of extended deadlines and the relaxation of rules for certain provisions of the Opportunity Zone program.
The Opportunity Zone program was created to encourage investment in economically-distressed communities. Opportunity zones are designated by each state and certified by the U.S. Treasury Department. The program allows taxpayers to defer eligible capital gains by investing in these designated Opportunity Zones through a Qualified Opportunity Zone Fund.
Here’s how Notice 2020-39 changes some of the Opportunity Zone deadlines and rules.
We broke down what Opportunity Zones are and how they could benefit you.
Extension of 180-day Investment Window
Generally, investors with qualified capital gains have 180 days from the date of sale generating the capital gains to reinvest those gains into a qualified opportunity fund (QOF). There are also special rules for partnerships, S corporations, and trusts realizing eligible capital gains. Under Notice 2020-39, if the last day of the 180-day reinvestment period falls between April 1 and December 31, 2020, the last day of the reinvestment period will be deemed to fall on December 31, 2020.
This relief is automatic and requires no further action. Taxpayers still must timely file their respective tax returns and report any eligible capital gain deferral on IRS Forms 8949 and 8997.
Qualified Opportunity Fund 90% Asset Test
Amongst other requirements, 90% of a QOF’s assets must consist of qualified opportunity zone business property, and a QOF is required to certify that it met this requirement on a semi-annual basis (via the QOF’s annual tax return).
If a QOF’s testing date falls between April 1 and December 31, 2020, Notice 2020-39 deems any failure of a QOF to meet the 90% to be due to reasonable cause and disregarded, meaning no penalty is applicable. The QOF enters a “0” in part IV, line 8 of the IRS form 8996 to negate any penalty. Again, this relief is automatic.
Working Capital Safe Harbor Extension for Qualified Opportunity Zone Businesses
A QOF investing into a qualified opportunity zone business (QOZB) can make use of a working capital safe harbor allowing the QOZB to hold working capital for up to 31 months (and up to 62 months if there are multiple qualified investments into the QOF) if the capital is held and used as part of a reasonable written plan to develop the QOZB’s qualified business. Under Notice 2020-39, 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 the working capital assets of the qualified opportunity zone business, so long as all other requirements are met.
Substantial Improvement Extension
A QOF acquiring an existing business asset (other than land) generally has 30 months to “substantially improve” the asset in order for the asset to be qualified property. Generally, this means one dollar of investment is required for every dollar of cost allocated to an acquisition (excluding land). Notice 2020-39 provides that the period between April 1 and December 31, 2020, is disregarded for purposes of the 30-month substantial improvement test, effectively meaning the 30-month period is tolled.
QOF’s 12-Month Reinvestment Period
A QOF selling otherwise qualified property has 12 months to reinvest the gains into other qualified property. Although the resulting gain is not deferred, a QOF is allowed to hold the sales proceeds in cash, cash equivalents, or short-term debt obligations and have the proceeds count as qualified property (so long as the gains are reinvested during the 12-month period).
Under Notice 2020-39, a QOF with a 12-month reinvestment period including January 20, 2020, receives an additional 12 months to reinvest the proceeds into qualified property.
Welcome Relief for Opportunity Zone Investors
Notice 2020-39 brings welcomed relief for Opportunity Zone investors affected by the COVID-19 pandemic. However, investors still must comply with the other Opportunity Zone requirements (including filing requirements).
Ready to see if an Opportunity Zone is right for your organization?
Take a deeper dive into this Insight’s subject matter.Tax