IRS Provides Additional COVID-19 Relief for Qualified Opportunity Funds
On June 4, 2020, the IRS released Notice 2020-39, which provides five key relief provisions for qualified opportunity funds (QOFs) and their investors in response to the ongoing COVID-19 pandemic:
- Extends the time period for certain investors to invest in a QOF
- Waives penalties for a QOF failing to meet the requirement that 90% of its assets are held in qualified property (the 90% Asset Test)
- Tolls the 30-month substantial improvement period for the period from April 1, 2020 to December 31, 2020
- Confirms the availability of the 24-month disaster extension for the working capital safe harbor
- Confirms the availability of the 12-month disaster extension for QOFs to reinvest proceeds from the sale of qualified property
Extension of 180-Day Investment Requirement for QOF Investors
In order to qualify for opportunity zone tax benefits, an investor generally must reinvest eligible gains into a QOF within 180 days of generating the gain. Earlier this spring, in Notice 2020-23, the IRS extended the investment deadline to July 15, 2020 for taxpayers whose 180-day period would have ended between March 31, 2020 and July 15, 2020. Notice 2020-39 further extends the investment deadline to December 31, 2020 if the last day of the 180-day investment period would fall on or after April 1, 2020 and before December 31, 2020. This extension is automatic, though taxpayers will still need to make a valid deferral election in accordance with the instructions on Form 8949, complete Form 8897, and file the completed Form 8949 and 8997 with their timely filed U.S. federal income tax return in the year in which the gain would have been recognized.
Relief for QOFs Failing to Meet the 90% Asset Test
In order for an entity to qualify as a QOF, a number of requirements must be met, including the 90% Asset Test—i.e., 90% of the QOF’s assets must be qualified property (as measured by averaging the percentages at the end of the first 6-month period and the last day of the taxable year). Notice 2020-39 provides that in the case of a QOF having a measurement date falling on or after April 1, 2020 through December 31, 2020, failure to satisfy the 90% Asset Test is automatically considered due to reasonable cause and no penalty will be assessed. In addition, such failure will not prevent qualification as a QOF or an investment from being a qualifying investment.
Tolling of 30-Month Substantial Improvement Requirement
Among other requirements, the original use of the property of a QOF in an opportunity zone must commence with the QOF or the QOF must substantially improve the property. The substantial improvement requirement is generally met only if, during any 30-month period beginning after the date of acquisition, the QOF’s additions to the property’s adjusted basis cause the adjusted basis of the property to more than double. Notice 2020-39 tolls this period from April 1, 2020 through December 31, 2020. Thus, QOFs beginning substantial improvements on their property on or after April 1, 2020 and prior to December 31, 2020 will not have to begin counting months toward the 30-month improvement period until January 2021.
Extension of Working Capital Safe Harbor
QOFs may hold reasonable amounts of working capital as cash or cash equivalents provided that certain tests are satisfied, including that the working capital is spent within 31 months (62 months for multiple tranches of capital). If property of a QOF is located in a federally declared disaster area, the QOF may have up to 24 additional months to meet this requirement. Effective January 20, 2020, President Trump declared major disaster declarations with respect to all 50 states, the District of Columbia and 5 territories, covering all opportunity zones. Notice 2020-39 confirms that QOFs holding working capital assets before December 31, 2020 will have 24 more months to spend working capital assets, provided the QOF satisfies all other requirements of the working capital safe harbor.
Extension of 12-Month Reinvestment Period
Finally, the recent Notice may extend a QOF’s reinvestment period. QOFs generally have 12 months to reinvest the proceeds from a return of capital or sale or disposition of qualified property into other qualified property, provided that the proceeds are continuously held in cash, cash equivalents or short-term debt instruments until reinvested. Similar to the working capital safe harbor exception, QOFs may now have an additional 12 months to reinvest such proceeds if the QOF held the proceeds intended for reinvestment on January 20, 2020 and the plan to reinvest is delayed because the relevant opportunity zone is in a federally declared disaster area.
Please visit our Coronavirus: Preparation & Response series for additional resources we hope will be helpful.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.