IRS Grants Additional Relief for Qualified Opportunity Funds

Greenberg Glusker LLP

On June 4, 2020, the IRS issued Notice 2020-39, which provides important relief to qualified opportunity zone investors (“QOZ Investors”), qualified opportunity funds (“QOFs”) and qualified opportunity zone businesses (“QOZBs”) as a result of the COVID-19 pandemic.

The relief granted by Notice 2020-39 consists of the following five elements:

1. Extension of the 180-day period to invest in a qualified opportunity fund.

Section 1400Z-2 of the Internal Revenue Code, which was enacted by the Tax Cuts and Jobs Act of 2017, allows investors to defer taxes on capital gains and potentially avoid future taxes by investing in a QOF. Investors generally have 180 days from the date of a sale giving rise to capital gains[1] to invest the realized gains in a QOF in order to avail themselves of these tax benefits.

On April 9, 2020, the IRS issued Notice 2020-23, which, among other things, gave investors whose 180th day falls in between April 1, 2020, and July 14, 2020, until July 15, 2020, to invest in a QOF in order to receive the tax benefits. Notice 2020-39 extends this relief to investors whose 180th day falls in between April 1, 2020, and December 30, 2020. Pursuant to Notice 2020-39, such investors automatically have until December 31, 2020, to invest in a QOF in order to receive the tax benefits.

2. Effective suspension of the 90-percent asset test for QOFs.

At least 90 percent of a QOF’s assets must consist of “qualified opportunity zone property” (“QOZ Property”). This requirement is tested semi-annually, and a penalty is typically assessed against the QOF if it fails to meet the 90-percent asset test (as determined by averaging the percentages of QOZ Property held by the QOF on the applicable testing dates). However, a QOF that fails to meet the 90-percent asset test will not be subject to a penalty if the QOF can show that the failure is “due to a reasonable cause.”

The semi-annual testing dates are the last day of the first six-month period of the QOF’s taxable year (which, for calendar year QOFs is June 30) and the last day of the QOF’s taxable year (which, for calendar year QOFs, is December 31).

Notice 2020-39 provides that a QOF’s failure to meet the 90-percent asset test on any testing date that falls between April 1, 2020, and December 31, 2020, will (i) automatically be treated as due to a reasonable cause, and (ii) be disregarded for purposes of determining whether the QOF has satisfied the applicable requirements.

In the case of calendar year QOFs, this rule effectively suspends the 90-percent asset test for 2020.

3. Tolling of the 30-month substantial improvement period.

One way for tangible property to count as a “good asset” for purposes of the 90-percent asset test or, in the case of a QOZB, the 70-percent asset test, is for the tangible property to be “substantially improved.” Tangible property is substantially improved if, during any 30-month period starting after the acquisition of such property, the QOF or QOZB makes additions to the tax basis of such property that, in the aggregate, equal or exceed such property’s adjusted tax basis at the start of such 30-month period.

Notice 2020-39 tolls the 30-month substantial improvement period for the period starting on April 1, 2020, and ending on December 31, 2020. For example, a 30-month substantial improvement period that began on March 1, 2020, would, without this relief, end on August 30, 2022. However, as a result of Notice 2020-39, this substantial improvement period is now extended by nine months, to May 31, 2023.

4. Extension of working capital safe harbor for QOZBs.

The qualified opportunity zone rules contain a safe harbor that allows QOZBs to maintain any amount of working capital for up to 31 months so long as certain requirements are met (the “Working Capital Safe Harbor”). The rules also provide that, if a QOZB is located in a Federally declared disaster area, the QOZB may receive an additional 24 months to expend its working capital assets.

Notice 2020-39 confirms that, as a result of the President’s March 13, 2020, emergency declaration and subsequent major disaster declarations under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, all QOZBs are located in Federally declared disaster areas. Accordingly, any QOZB that receives working capital assets on or before December 30, 2020, will receive up to an additional 24 months to spend such assets, provided that such assets were intended to be covered by the Working Capital Safe Harbor and all other Working Capital Safe Harbor requirements are satisfied.

5. Extension of 12-month reinvestment period for QOFs.

If a QOF reinvests proceeds that it receives as a return of capital or from the sale or disposition of its QOZ property within 12 months, such proceeds will be treated as qualified opportunity zone property for purposes of the 90-percent asset test (provided that certain other requirements are satisfied). If the QOF’s planned reinvestment is delayed due to a Federally declared disaster, then the QOF may receive up to an additional 12 months to reinvest the applicable proceeds.

Notice 2020-39 provides that any QOF whose 12-month reinvestment period includes January 20, 2020, (the date identified in the President’s major disaster declarations as the start of the COVID-19 pandemic) will receive an additional 12 months to reinvest eligible proceeds, provided that the QOF satisfies the other applicable requirements.

Additional information regarding the rules relating to investments in qualified opportunity zones can be found here.

[1] In certain instances, the 180-day period will start on a different date, such as the last day of a partnership’s taxable year or the due date of a partnership’s tax return.

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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