Investors in new business ventures and real estate projects have experienced significant disruption because of the COVID-19 pandemic. Deals have been delayed; or worse, many deals have fallen through. This is no different for investors looking to utilize the qualified opportunity zone (QOZ) tax incentive.
To help provide relief to qualified opportunity funds (QOFs), qualified opportunity zone businesses (QOZBs), and their investors, the IRS issued Notice 2020-39 on June 4, 2020.
The notice grants certain deadline extensions and working capital suspensions due to COVID-19-related interruptions that may have delayed project financing, planning, approval, and construction activities.
The relief, outlined below, provides investors more flexibility in making QOF investments and developing property within a QOZ during the pandemic.
Last Day of 180-Day Investment Requirement Deferred
Generally, taxpayers have a 180-day period to invest capital gain proceeds to claim the QOZ benefits.
If the last day of the 180-day investment period was set to occur on or after April, 1, 2020, the notice postpones the last day of the 180-day investment period for a taxpayer to invest a qualifying gain in a QOF to December 31, 2020.
For example, if a taxpayer realized a capital gain on November 15, 2019, the 180-day period for making a QOF investment would have expired on May 12, 2020. The notice extends this May 12 deadline to December 31, 2020.
Taxpayers are still required to make proper deferral elections on Form 8949 and file Form 8997 either with their timely-filed 2020 tax return or on an amended return.
Failure to Meet 90% Investment Standard Disregarded
A QOF is required to hold at least 90% of its assets in qualified opportunity zone property (QOZP).
The QOF rules generally require the testing based on an average of the percentage of QOZP at the end of the first six-month period and on the last day of the tax year. Failure to meet the 90% average QOZP threshold generally subjects the QOF to penalties.
The notice provides automatic relief for a QOF with any testing date falling between April 1, 2020, and December 31, 2020, that fails to satisfy the 90% investment standard. In these situations, the QOF is deemed to have a reasonable cause and the failure is disregarded for purposes of determining if the fund meets the general QOF requirements.
A QOF must accurately complete all lines on Form 8996 with their timely-filed tax returns for the affected tax years. However, the QOF will place a “0” on Part IV Line 8 for the imposed penalty that would otherwise be due for failing the standard.
30-Month Substantial Improvement Period Extended
Tangible property—other than original use property—is treated as qualified opportunity zone business property (QOZBP) if substantially improved within a 30-month period beginning after the date of the acquisition. The substantial improvement requirement is commonly known as the double-the-basis rule.
The notice provides that, for purposes of the substantial improvement requirement of QOZBP, the period beginning on April 1, 2020, and ending on December 31, 2020, is disregarded in determining any 30-month substantial improvement period.
Working Capital Safe Harbor Extension Confirmed
Final regulations released in late 2019 included a 24-month extension of the 31-month working capital safe harbor period for a QOZB in a federally-declared disaster area.
The notice confirms that all QOZBs will be considered in a federally-declared disaster area, which automatically makes them eligible for the 24-month extension provided that all other requirements of the working capital safe harbor are met.
12-Month Reinvestment Period Extension Confirmed
The final regulations provide that proceeds received from dispositions of QOZP won’t be treated as disqualified property if, as of the last day of the 12-month period beginning on the date of disposition, the proceeds are invested in a QOZP.
Final regulations provided a 12-month extension of this reinvestment period for any delay in the reinvestment due to a federally-declared disaster. The notice confirms that any QOF with a 12-month reinvestment period including January 20, 2020, automatically receives an additional 12 months to reinvest proceeds.
We’re Here to Help
For more insights on QOZ matters or questions on how Notice 2020-39 could impact your business, please contact your Moss Adams professional.