IRS Provides Several Items of Relief Benefiting Qualified Opportunity Funds and their Investors
Insight Debbie A. Klis · June 05, 2020
On June 4, 2020, the Internal Revenue Service (IRS) released Notice 2020-39 that contains relief for several of the time-sensitive requirements for qualified opportunity funds (QOFs) and for taxpayers who invest capital gains in qualified opportunity zones (QOZs). The QOZ program designates economically-distressed communities (more than 8,700 QOZs nationwide) and encourages private investment and economic growth in the QOZs.
Relief Regarding the 180-day Investment Period. In response to the COVID-19 pandemic, Notice 2020-39 provides relief for taxpayers, in connection with the 180-day period to invest capital gains in a qualified opportunity fund (QOF), whose reinvestment deadline falls on or after April 1, 2020 but before December 31, 2020. Effective immediately, the 180-day period governed by Internal Revenue Code section 1400Z-2(a)(1)(A) is postponed to December 31, 2020 for such taxpayers (recall that on April 9, 2020, the IRS released Notice 2020-23 to postpone the time-sensitive requirement to invest to July 15). To enjoy this extension of time to invest in a QOF, taxpayers must document their deferral election (Form 8949 and Form 8997) with their timely filed federal income tax return to the IRS for the taxable year in which the gain would be recognized but/for the reliance on Internal Revenue Code Section 1400Z-2(a)(1).
Relief Regarding the 30-month Substantial Improvement Test. Notice 2020-39 contains relief in the form of a suspension of the tolling of the 30-month substantial improvement test governing tangible property purchased, leased, or improved by a trade or business that is undergoing the substantial improvement process. With respect to tangible property that has not yet been placed in service or used in a QOF (or in QOZ trade or business), the safe harbor in the final regulations treats tangible property as QOZ business property if the QOF or QOZ business expects the property to be used in its trade or business in an opportunity zone by the end of the 30-month period. Notice 2020-39 suspends from the tolling of the 30-month period, the eight-month period between April 1, 2020 and December 31, 2020, which is expected to benefit QOFs that are not eligible for the working capital safe harbor.
Relief Regarding the 90% Asset Test for QOZ Property. Notice 2020-39 provides relief for a QOF who fails the 90% asset test because not less than the 90% of its assets are invested in QOZ property on its semi-annual testing dates between April 1, 2020 and December 31, 2020. Because of the COVID-19 pandemic, a QOF’s failure to satisfy the 90% asset test during this eight-month period is automatically deemed due to “reasonable cause” under Internal Revenue Code section 1400Z-2(f)(3). Accordingly, the failure would cause a disqualification as a QOF or a taxpayer’s investment in a QOF from being a qualifying investment and no penalties will result.
Relief Under the Working Capital Safe Harbor. Notice 2020-39 grants an additional 24 months to the current “31-month working capital safe harbor” under the final regulations due to the COVID-19 pandemic. Recall that the final regulations cap the amount of cash and cash equivalents permitted in a QOZ business. The safe harbor allows QOZ businesses to hold cash for up to 31 months if there is a written plan for the use of the cash for the development of a trade or business or for the acquisition, construction, or substantial improvement of tangible property in a QOZ that is consistent with ordinary business operations of the business providing for its use 31 months and the QOZ business substantially complies with the plan. The final regulations added a 62-month safe harbor for startup businesses if the startup business received multiple rounds of financing during the startup phase; a startup QOZ business can qualify for a 31-month safe harbor with respect to the first round of financing, which the QOZ business can extend for up to 31 months more for second round of financing if it meets the safe harbor requirements including being part of an integral plan. The additional 24 months to expend the working capital assets of the QOZ business will be welcome news in view of recent political and economic turmoil.
Potential Opportunity Zone Extension. Additional support for the QOZ program due to the COVID-19 pandemic is in the works in Congress with White House support. Congressman Scott Tipton (CO-03) with fellow House colleagues introduced H.R.6513, “The Opportunity Zone Extension Act,” on April 14, 2020, that would extend the QOZ program from December 31, 2026 to December 31, 2030 and provide additional opportunities for investors to participate in the QOZ program.
Notice 2020-39 is available here: https://www.irs.gov/pub/irs-drop/n-20-39.pdf and H.R.6513 is available here: https://www.congress.gov/bill/116th-congress/house-bill/6513?s=1&r=2
Debbie represents private investment funds and investment advisers in connection with fund structuring, advertising, private placement procedures, compliance policies and procedures, side letters, placement contracts, related agreements and issues. Debbie’s experience includes private equity funds, venture capital funds complex partnership reorganizations, domestic and offshore hedge funds, Opportunity Zone Funds, real estate investment funds and trusts, EB-5 funds, and large master-feeder structures. Debbie has extensive experience with private securities offerings and financial products, including through crowdfunding, domestic and international joint ventures, global equity offerings, where she represents placement agents, issuers, broker-dealers, public and private companies, investment banks, financial institutions, private funds, and investment advisers. Read more about Debbie Klis here.
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