IRS Defers Due Dates for QOZ Actions to Provide Relief for Taxpayers Affected by the Coronavirus PandemicJune 9, 2020
On June 4, 2020, the IRS issued Notice 2020-39 (the “Notice”), addressing concerns of investors and Qualified Opportunity Funds (“QOFs”) over looming deadlines and tests applicable to the investment of gains deferred under the Qualified Opportunity Zone (“QOZ”) program. The Notice has the effect of pushing a few crucial deadlines back to the end of 2020 or beyond.
Under existing QOZ rules, a taxpayer can defer tax on gains recognized, and secure potential additional tax benefits, by investing taxable gains in QOFs within 180 days after those gains would otherwise be required to be recognized. The QOF, in turn, is required to invest its funds so that 90% of its assets consist of qualified opportunity zone property (or “QOZP”), as determined by determining the average of the assets of the QOF on semi-annual testing dates. If it disposes of some or all of its QOZP (or receives certain distributions treated as returns of capital with respect to a QOZP investment) and reinvests the proceeds in replacement QOZP with 12 months, the proceeds will be treated as QOZP for purposes of the 90 percent asset test.
An investment in the equity of an entity that qualifies as a qualified opportunity zone business (a “QOZB”) will constitute QOZP. In order for an entity to be a QOZB, it must invest its assets in a manner that meets a number of requirements, including the requirement that less than 5 percent of its property be invested in so-called “nonqualified financial property,” such as cash and certain other liquid investments. However, the QOZB can hold cash, cash equivalents or certain short-term debt instruments as working capital, in compliance with a safe harbor provided in the Treasury Regulations, for a period of up to 31 months.
Another rule provides that certain property is QOZP if it is “substantially improved” by the QOF (or QOZB), meaning that, during any 30-month period beginning on the date of acquisition of the property after 2017, there are additions to the tax basis of the property that exceed its basis at the beginning of that period.
The Notice addresses the application of these rules by providing that:
- The 180-day deadline for reinvestment of gains is deferred until December 31, 2020 for any taxpayer that would otherwise be required to invest in a QOF between April 1, 2020 and December 31, 2020.
- Any failure by a QOF to meet the 90 percent asset tests on any testing date that falls during the period beginning on April 1, 2020 and ending on December 31, 2020 will be treated as due to reasonable cause and will be disregarded in determining whether the test has been met. Effectively, this allows a QOF to defer its investment in QOZP until 2021.
- Any QOF that would otherwise be required to reinvest proceeds from a disposition of QOZP during a 12-month period that includes January 20, 2020 has up to 12 additional months in which to invest those proceeds without jeopardizing its status as a QOF. If the disposition of the QOZP occurs after January 20, 2020, however, it would appear that no relief is provided.
- The 31-month period during which a QOZB can hold nonqualified financial property under the working capital safe harbor in extended by as much as 24 months.
- The period from April 1, 2020 through December 31, 2020 is disregarded in determining whether the 30-month test for substantial improvement of property as met.
These announced changes by the IRS can provide significant relief to QOF investors and sponsors who are struggling with the impact of the Coronavirus pandemic on their QOZ investment plans.
For assistance in assessing how these rules affect your particular circumstances, please feel free to reach out to us.
© 2020 Herrick, Feinstein LLP. This information is provided to keep clients and interested parties informed of legal developments that may affect or interest them. The information is not intended as legal advice or legal opinion and should not be construed as such.