Extensions of COVID-19 Relief for Opportunity Zone Funds

Allen Matkins

Allen Matkins

In IRS Notice 2021-10 (the New Notice), the IRS granted relief to Opportunity Zone Funds because of the COVID-19 pandemic. The New Notice generally extends the relief that had previously been granted pursuant to IRS Notice 2020-39 (the Prior Notice). Relief under the Prior Notice generally expired on December 31, 2020; the New Notice extends this relief into 2021. The main benefits are the following:


Investors have a 180-day period in which to invest in an Opportunity Zone Fund. Under the New Notice, if that 180-day period would ordinarily end after March 31, 2020, the period may be extended until March 31, 2021. (The Prior Notice extended this period only until December 31, 2020.)


An Opportunity Zone Fund must generally satisfy various criteria that are evaluated on two testing dates each year. If the criteria are not satisfied, penalties may be imposed on the fund. The New Notice generally waives Opportunity Zone penalties for the 2020 and 2021 tax years if the fund was formed before 2021. The New Notice does not waive any penalties for Opportunity Zone Funds formed in 2021, however.


A "qualified opportunity zone business" generally has a 31-month safe harbor for holding working capital, and regulations allow for a 24-month extension when the business is located within a Federally declared disaster area. The New Notice confirms that this 24-month extension is available for any working capital held before June 30, 2021. (The Prior Notice confirmed that this 24-month extension was available for any working capital held before December 31, 2020.) Therefore, each dollar that a qualified opportunity zone business holds before June 30, 2021, under the working capital exception must generally be spent within 55 months of receipt; the business cannot benefit from two 24-month extensions.

However, the working capital safe harbor (as well as associated safe harbors for, e.g., tangible property) may be availed of more than once, to different funds received, subject to a 62-month limitation. For example, a qualified opportunity zone business may receive a capital contribution when it is formed and receive a second capital contribution 31 months later, with both contributions qualifying under the working capital safe harbor. The New Notice provides that this 62-month limitation may also be extended by 24 months as a result of the COVID-19 disaster.


One way for an Opportunity Zone Fund to qualify as such is to "substantially improve" its tangible property, and property is "substantially improved" if the basis of the property is doubled within a 30-month period as a result of improvements that are made to the property. For example, if an Opportunity Zone Fund pays $1 million to acquire a building and spends another $1 million to improve the building within a 30-month period, the building will be substantially improved.

The New Notice extends this 30-month substantial improvement period. As a result of COVID-19, the period from April 1, 2020, through March 31, 2021, may be disregarded, which may give an Opportunity Zone Fund (or a qualified opportunity zone business) an additional 12 months to double its basis in its property. (The Prior Notice granted only a 9-month extension.)


At least 90% of an Opportunity Zone Fund's assets must be "qualified opportunity zone property" (QOZP), which does not include cash. However, if an Opportunity Zone Fund sells QOZP, the sale proceeds may be treated as QOZP if they are reinvested within 12 months and certain other conditions are satisfied. Regulations allow for a 12-month extension when the reinvestment is delayed due to a Federally declared disaster, provided that the proceeds are invested in the manner that was intended before the disaster.

The New Notice provides that this 12-month extension may be available if the fund's reinvestment period includes June 30, 2020. With this extension, a fund would have a 24-month period in which to reinvest. However, the period is not extended beyond 24 months, even if the fund was eligible for an extension under the Prior Notice. (Under the Prior Notice, a 12-month extension was available if the fund’s reinvestment period included January 20, 2020.)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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