As we all re-examine business practices in the uncharted waters of COVID-19, the Sullivan Opportunity Zone Practice Group will be publishing concise reminders of best practices.

Guidance abounds, including our own, relating to the working capital safe harbor and the extension of time periods in light of the national pandemic. The predicate to the safe harbor and any extension relief is the existence of a written plan. That leads us to today’s reminder.

When taxpayers file tax returns claiming the tax exclusion on any gain realized after their ten-year hold period, any IRS audit of such returns will "look back." Much like IRS audits involving Net Operating Losses, taxpayers will have to prove compliance with the Opportunity Zone statute from the time of the initial investment in a Qualified Opportunity Fund. Detailed records will help taxpayers survive challenges. Taxpayers (and third-party fund sponsors) should keep all records beginning with the initial investment in the Opportunity Fund through the disposition of the investment and beyond. This practice, of detailed documentation, will be even more valuable if one seeks to take advantage of any extension relief offered under the Opportunity Zone Regulations, and therefore the taxpayer must prove that COVID-19 caused a disruption in one’s documented plan. This "best practice" will also ensure that, upon an IRS audit, a taxpayer does not lose any of the Opportunity Zone benefits due to the lack of appropriate documentation.

Right now, we have the time to do it right. In almost all cases, the more detail, the better, and it is always best practice to maintain all records.