IRS Extends Opportunity Zone Deadlines

In response to the ongoing COVID-19 pandemic, the IRS has issued Notice 2020-39, providing relief for qualified opportunity funds (QOFs) and their investors by extending key deadlines related to opportunity zone investments.

Extension of Time to Invest Capital Gains into QOFs.  Generally, a taxpayer may elect to exclude from gross income for a taxable year capital gain invested in a QOF during the 180 day period beginning on the date of the sale or exchange.  Previously, in Notice 2020-23, the IRS extended this 180 day period to July 15, 2020 if the last day of the 180 day period would have ended on or after April 1, 2020 and before July 15, 2020.  In Notice 2020-39 the IRS further extends this deadline, providing that if the last day of the 180 day investment period falls on or after April 1, 2020 and before December 31, 2020, the last day of the 180 day investment period is postponed to December 31, 2020.  This extension is automatic. 

90% Investment Standard for QOFs.  A QOF must hold at least 90% of its assets in  qualified opportunity zone property, determined by the average of the percentage of such property held by the QOF as measured on the last day of the first six month period of the taxable year of the QOF and on the last day of the taxable year of the QOF.  In Notice 2020-39 the IRS provides that any failure of a QOF to satisfy the 90% investment standard between April 1, 2020 and December 31, 2020 will automatically be treated as satisfying the reasonable cause standard for that year for avoiding penalties.  The notice also provides that any such failure will be disregarded in determining whether a QOF satisfies the requirements for qualifying as a QOF and whether investments in the QOF are qualifying investments.

Substantial Improvement Requirement.  QOFs and qualified opportunity zone businesses generally must substantially improve tangible property in the opportunity zone if the original use of the property does not begin with the QOF or a qualified opportunity zone business.  The substantial improvement requirement is met only if, during the 30 month period after acquisition, there are additions to the basis of the property that exceed the beginning adjusted basis.  In Notice 2020-39 the IRS stated that for purposes of the substantial improvement requirement, the period beginning on April 1, 2020 and ending on December 31, 2020 is disregarded in determining any thirty month substantial improvement period.

Extension of Working Capital Safe Harbor.  Less than 5% of its aggregate unadjusted basis of its property held by a qualified opportunity zone business can be attributable to non-qualified financial property.  Treasury Regulations provide a working capital safe harbor that, if the requirements are satisfied, treats as reasonable working capital amounts expended within 31 months of receipt, and in some cases up to 62 months of receipt, assuming that all working capital safe harbor requirements are met.  In Notice 2020-39 the IRS confirms that a qualified opportunity zone business holding working capital intended to be covered by the working capital safe harbor before December 31, 2020 will have an additional 24 months to expend the working capital assets.

Twelve Month Reinvestment Period for QOFs.  Treasury Regulations generally provide that if a QOF sells or disposes some or all of its qualified opportunity zone property and reinvests the proceeds in qualified opportunity zone property within a 12 month period, then the proceeds, to the extent so reinvested, are treated as qualified opportunity zone property.  In Notice 2020-39 the IRS provides that if a QOF’s 12 month reinvestment period includes January 20, 2020, the QOF receives an additional 12 months to reinvest in qualified opportunity zone property.

KMK Law attorneys are here to provide you with advice and guidance with these and other issues. Contact Mark Sims at 513.579.6966 or msims@kmklaw.com for assistance.