IRS provides additional relief to OZ funds and investors

On June 4, 2020, the IRS issued Notice 2020-39 (the Notice), granting relief to qualified opportunity funds (QOFs) and their investors from some of the opportunity zone (OZ) program’s time-sensitive requirements. This latest tranche of COVID-19-related guidance provides automatic relief with respect to some of the provisions as well as confirmation of the extensions to comply with others in the event of a federally declared disaster available under the OZ regulations.

Specific relief provided:

• Investors are granted an additional extension of the 180-day period in which they must acquire a QOF interest in exchange for the OZ tax benefits. In April, the IRS provided investors whose 180-day period would have otherwise ended between April 1, 2020, and July 14, 2020, until July 15, 2020, to make an eligible investment in a QOF (please see our previous Tax Alert). Taxpayers now have until Dec. 31, 2020, to invest if their 180-day period otherwise would have ended on or after April 1, 2020, and before Dec. 31, 2020. This relief is automatic. Significantly, pass-through gains reported on a 2019 Schedule K-1, which previously had to be invested by Sept. 11, 2020, can now be invested until Dec. 31, 2020.
• A QOF’s failure to comply with the 90% asset test will be disregarded. A QOF will incur steep penalties if it fails to hold 90% of its assets in qualified opportunity zone property (QOZP) as of semi-annual testing dates, unless it can demonstrate the failure was due to reasonable cause. The Notice provides a QOF that fails to meet this test whose (1) last day of the first six-month period of the taxable year, or (2) the last day of the taxable year falls between April 1, 2020, and Dec. 31, 2020, will automatically be deemed to have a reasonable cause, and the failure will be disregarded for determining whether the QOF otherwise is compliant with the program’s rules. In other words, no penalties will be assessed.
• 30-month substantial improvement period is extended. A QOF or qualified opportunity zone business (QOZB) that purchases non-original use property must “substantially improve” it in order for the property to qualify as qualified opportunity zone business property (QOZBP). Broadly, substantial improvement requires that an amount exceeding the QOF’s or QOZB’s purchase price be spent improving the property within any 30-month period. The Notice automatically tolls all 30-month windows during the period beginning on April 1, 2020, and ending Dec. 31, 2020. For instance, if a QOZB’s substantial improvement period began April 1, 2020, that QOZB would have 39 months to improve the property.

Confirmation of federally declared disaster extensions provided by final regulations:

As a result of the national emergency declarations issued by the president in response to COVID-19, every census tract designated as an OZ is located within a major disaster area as of Jan. 20, 2020. The Notice confirms the federal disaster relief included within the OZ regulations is available to taxpayers.

Critically, a QOZB has additional time to make expenditures pursuant to a working capital safe harbor. A QOZB can utilize up to two consecutive 31-month safe harbors to deploy working capital to acquire or construct property, or start a business within an OZ pursuant to a written plan, without running afoul of certain asset tests. The Notice makes clear that assuming all other parameters of the working capital safe harbor are met, a QOZB will receive not more than an additional 24 months to expend such working capital on account of the federally declared disaster, as provided for under the OZ regulations.

Please reach out to your Baker Tilly tax advisor to discuss how these potential changes may affect your tax situation.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.