On June 4, 2020, in response to the ongoing COVID-19 pandemic, the IRS issued Notice 2020-39 to provide relief regarding various deadlines applicable to the federal opportunity zone program.
As a general matter, the opportunity zone program allows taxpayers to (i) defer paying tax on capital gains if they invest in a qualified opportunity fund (QOF) within 180 days of recognizing the gain, (ii) reduce the amount of that gain when the tax becomes due, and (iii) avoid tax on gains resulting from the investment in the QOF provided the investment is held for 10 years.
The opportunity zone program contains numerous timeframes in which investments must be made and money spent. Recognizing that the pandemic has had a significant impact on the economy and the timing of various investments and projects, the IRS has provided relief on the following points:
- 180-Day Period. If the end of the 180-day period in which a taxpayer must invest in a QOF falls between April 1, 2020, and December 31, 2020, the last day of the period is automatically extended to December 31, 2020.
- 90% Test for QOFs. As a general matter, if a QOF fails to have at least 90% of its assets be qualified opportunity zone property on two testing dates, generally June 30 and December 31, penalties apply to the QOF. The IRS Notice provides that any failure to meet the 90% test on a testing date falling between April 1, 2020, and December 31, 2020, will be disregarded.
- 30-Month Substantial Improvement Period. For used property to be considered qualified opportunity zone business property it must be substantially improved within 30 months of acquisition. The IRS has provided that the 30-month period is tolled from April 1, 2020, through December 31, 2020.
- 31-Month Working Capital Safe Harbor. For an entity to be a qualified opportunity zone business it must meet various requirements, including nonqualified financial property (e.g., cash) not being more than 5% of its total assets. IRS regulations provide an exclusion for cash used for acquisition, construction, and development of property, provided it is used in certain time frames, generally 31 months. The IRS has confirmed that the timeframe is extended by 24 months for all qualified opportunity zone businesses.
- 12-Month QOF Reinvestment Period. A QOF generally has 12 months to reinvest capital it receives from the disposition of qualified opportunity zone property. The IRS has confirmed that QOFs will have an additional 12 months if a QOF’s original 12-month reinvestment period includes January 20, 2020.