IRS Extends Previously Issued Relief to Qualified Opportunity Funds and Their Investors

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Morgan LewisThe Internal Revenue Service (IRS) issued Notice 2021-10 on January 19, which extends relief to Qualified Opportunity Funds (QOFs) and their investors as a response to continued challenges brought on by the COVID-19 pandemic.

The notice extends previous relief provided by Notice 2020-39, which was issued in June 2020 and discussed in a prior LawFlash.

Rule Previous Relief Revised Relief
180-Day Investment Requirement for QOF Investors 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 that 180-day investment period is postponed to December 31, 2020. If the last day of the 180-day investment period falls on or after April 1, 2020, and before March 31, 2021, the last day of that 180-day investment period is automatically postponed to March 31, 2021.

If an investor is interested in deferring a 2019 gain and has already filed a tax return for the 2019 year, the taxpayer will need to file an amended return in order to defer the gain. All investors must still complete Forms 8949 and 8997.

30-Month Substantial Improvement Period for QOFs and Qualified Opportunity Zone Businesses ( QOZBs )

Tolled for April 1, 2020 through December 31, 2020.

Tolled for April 1, 2020 through March 31, 2021.

90% Investment Standard

In the case of a QOF whose ( 1) last day of the first six-month period of the taxable year or ( 2) last day of the taxable year falls within the period beginning on April 1, 2020, and ending on December 31, 2020, any failure to satisfy the 90% investment standard is treated as due to reasonable cause and disregarded for purposes of determining QOF compliance.

Relief is automatic, but the QOF must otherwise accurately complete Form 8996 except that the QOF should enter “0” in Part IV, Line 8 (penalty).

In the case of a QOF whose (1 ) last day of the first six-month period of the taxable year or (2 ) last day of the taxable year falls within the period beginning on April 1, 2020, and ending on June 30, 2021, any failure to satisfy the 90% investment standard is treated as due to reasonable cause and disregarded for purposes of determining QOF compliance.

Relief is automatic, but the QOF must otherwise accurately complete Form 8996 except that the QOF should enter “0” in Part IV, Line 8 (penalty).

Working capital safe harbor for QOZBs

Provides up to an additional 24 months for all QOZBs holding working capital assets intended to be covered by the working capital safe harbor before December 31, 2020, provided the QOZB otherwise meets the requirements of the safe harbor.

Provides up to an additional 24 months, including any relief provided under Notice 2020-39, for a maximum safe harbor period of not more than 55 months total (not more than 86 months total for start up businesses), for all QOZBs holding working capital assets intended to be covered by the working capital safe harbor before June 30, 2021, provided the QOZB otherwise meets the requirements of the safe harbor.

12-Month Reinvestment Period for QOFs

If any QOF's 12-month reinvestment period includes January 20, 2020, that QOF receives up to an additional 12 months to reinvest in qualified opportunity zone property ( QOZ property ) some or all of the proceeds received by the QOF from the return of capital or the sale or disposition of some or all of the QOF's QOZ property, provided that the QOF satisfies the requirements of 26 CFR § 1.1400Z2(f)-1(b)(1) and invests the proceeds in the manner originally intended before January 20, 2020.

If any QOF's 12-month reinvestment period includes June 30, 2020, that QOF receives up to an additional 12 months, including any relief previously granted under Notice 2020-39, for a maximum period of up to 24 months total, to reinvest in QOZ property some or all of the proceeds received by the QOF from the return of capital or the sale or disposition of some or all of the QOF's QOZ property, provided that the QOF satisfies the requirements of 26 CFR § 1.1400Z2(f)-1(b)(1) and invests the proceeds in the manner originally intended before June 30, 2020.

Participants in the qualified opportunity zone program should consult their tax advisors regarding the relief provided by Notice 2021-10.
 

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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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