In Notice 2020-39, the IRS extended a number of deadlines for the Qualified Opportunity Zone (QOZ) program. For a detailed explanation of the rules applicable to the QOZ program, see our discussion of the final QOZ regulations.
Notice 2020-39 automatically extends all of the following deadlines:
- A taxpayer has 180 days to invest all or part of its capital gain in a qualified opportunity fund (QOF) from the date the gain is recognized (with special rules for owners of partnerships and S corporations as to the start date of the 180-day period). Pursuant to Notice 2020-39, if the last day of a taxpayer’s 180-day period is between April 1, 2020, and December 31, 2020, the last day of the 180-day period is deemed to be December 31, 2020. A taxpayer that avails itself of this extension must file IRS Forms 8949 (Sales and Dispositions of Capital Assets) and 8997 (Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments) with a timely filed (including extensions) or amended federal income tax return for the year in which the gain would have been recognized, absent the taxpayer’s investment in a QOF.
- To qualify as a QOF, an average of 90 percent of an entity’s assets must be composed of QOZ property on two snap shot dates (generally, the end of the first six months of the QOF’s tax year and the last day of the QOF’s tax year). Failure to satisfy this requirement results in penalties being imposed on the QOF, absent reasonable cause for the failure. QOZ property is qualified opportunity zone business property (QOZBP) and an interest in an entity that is a qualified opportunity zone business (QOZB). Pursuant to Notice 2020-39, for a QOF whose last day of the first six months of its taxable year or whose last day of its taxable year falls between April 1, 2020, and December 31, 2020, any failure to satisfy this 90 percent test will be deemed to be due to reasonable cause and will be disregarded for purposes of determining whether the entity qualifies as a QOF. A QOF that avails itself of this extension must accurately complete all lines on its timely filed IRS Form 8996 (Qualified Opportunity Fund) with respect to the affected tax year, except that it should put -0- in Part IV, Line 8 (Penalty).
- For tangible property to qualify as QOZBP, among other requirements, if the property already was located in a QOZ, it must be substantially improved during any 30-month period the property is owned by the QOF or QOZB. To substantially improve property, the QOF or QOZB must spend more than its acquisition cost for such property on capital improvements to the property. Pursuant to Notice 2020-39, the period from April 1, 2020, through December 31, 2020, is ignored in determining the 30-month improvement period.
- Less than 5 percent of a QOZB’s assets may be invested in nonqualified financial property. Cash and other working capital assets are nonqualified working capital unless they are “reasonable working capital.”The regulations establish a working capital safe harbor allowing a QOZB to hold working capital for 31 months with extensions for up to another 31 months, if certain requirements are satisfied. Pursuant to Notice 2020-39, all QOZBs holding working capital that is intended to satisfy the working capital safe harbor before December 31, 2020, will receive up to an additional 24 months to spend that working capital so long as the funds continue to satisfy the working capital safe harbor.
- If a QOF (a) sells either QOZBP or an interest in a QOZB or (b) receives a distribution from a QOZB that is a return of capital, if the QOF has a plan to reinvest those proceeds in QOZBP and/or an interest in a QOZB, the proceeds are treated as QOZ property during the 12-month period following the sale or distribution, if certain rules are satisfied. Pursuant to Notice 2020-39, if the QOF’s plan to reinvest such proceeds is delayed due to the federally declared disaster for the coronavirus, the QOF may receive up to another 12 months to reinvest those proceeds in the manner originally intended before January 20, 2020.