The IRS recently issued additional Opportunity Zone-related guidance, Notice 2020-39, that grants extension relief with respect to five specific time-sensitive actions. Among other things, Notice 2020-39 (i) allows certain investors additional time under the 180-day period to invest their qualified gains in a QOF, if the 180-day period would otherwise end between April 1, 2020 and December 30, 2020, to December 31, 2020 and (ii) provides that QOFs will be automatically eligible for the “reasonable cause” exception and will report zero penalty if they fail to meet the 90% investment standard for any applicable testing date that falls between April 1, 2020 through December 31, 2020. See Sullivan’s prior Client Alert from June 9, 2020.
Notice 2020-39 states that the relief related to the two above-mentioned areas is “automatic,” and “taxpayers do not need to call the IRS or send letters or other documents to the IRS to receive this relief.” It is important to note that certain other relief provided by Notice 2020-39 may not be “automatic.”
Specifically, although Notice 2020-39 provides additional time for QOZBs to satisfy certain compliance tests, if the applicable project is located in a QOZ within a “federally-declared disaster” (as defined in Section 165(i)(5)(A) of the Internal Revenue Code of 1986, as amended), Notice 2020-39 does not characterize the compliance relief as “automatic.” In fact, with respect to the 31-month working capital safe harbor provided by the Final Regulations (which can be extended to a maximum of 62 months if certain requirements are satisfied), Notice 2020-39 provides that a QOZB located within a QOZ within a federal-declared disaster may receive “not more than an additional 24 months” to expend its working capital.
The Final Regulations require that eligible expenditures occur “within” 31 months of the receipt by the business of the (working capital) assets. The Regulations permitting extensions for a second 31-month period and 24 additional months for business with a QOZ within a “federally-declared disaster” area use a framework of “up to” when referencing such additional time periods. Additionally, with respect to the working capital safe harbor, Notice 2020-39 restates the rule that a QOZB has, in addition to the original 31-month time period, “not more than” an additional 24 months to expend its working capital. In each instance, there is no reference to having an “automatic” right to do so.
The absence of “automatic” language, coupled with the words “not more than,” serves as a reminder to d QOZBs that the use of the working capital safe harbor of any length requires:
- a written plan and schedule;
- that the schedule be consistent with the ordinary start-up of a trade or business; and
- substantial compliance with such schedule.
In essence, the requirement that the schedule “be consistent with the ordinary start-up of a trade or business” requires the QOZB’s written plan to be reasonable. Therefore, while the Final Regulations, coupled with Notice 2020-39, permit QOZBs to take up to a maximum of 86 months to spend its working capital if needed, any QOZB may later have to justify the timing of such expenditures including, if applicable, why it was reasonable to take advantage of any additional time beyond the original safe-harbor period.
We recommend that whether a QOZB’s schedule is less than 31 months, exactly 31 months or any other number of extended months, the QOZB’s plan and schedule should document the business basis for the period of the claimed safe harbor. With these records, QOFs and QOZBs will be in the best position to meet any IRS scrutiny.