To provide relief in response to the COVID-19 pandemic for Qualified Opportunity Funds (QOFs), Qualified Opportunity Zone Businesses (QOZBs), and investors, the IRS issued Notice 2020-39. This notice provides expanded timelines for investors to make eligible investments, provides the QOFs and QOZB’s expanded timelines surrounding testing for investment standards, working capital safe harbors, and time to reinvest certain proceeds.
In order to defer capital gains under the QOF regulations, a taxpayer who has realized a capital gain has 180-days to invest that capital gain into a QOF. If the capital gain is realized through a passthrough entity, the taxpayer can begin their 180-day requirement as late as the original due date of the passthrough entities tax return.
Notice 2020-39 provides automatic relief for investors whose original 180-day period ended on or after April 1, 2020 and before December 31, 2020, by providing that the new investment period ends on December 31, 2020. Therefore, gains realized between October 4, 2019 and July 4, 2020 now have the 180-day period ending on December 31, 2020.
The timing of the investment should be taken into consideration when filing your 2019 tax return. Investors have the ability to invest after the due date of their return. Under that scenario, the investor would recognize the 2019 capital gain on their originally filed return, and would have to amend to claim a refund if they make a qualifying QOF investment after the original return was filed.
QOFs are required to maintain a 90% investment standard in Qualified Opportunity Zone Business Property (QOZBP), which is typically tested twice a year at June 30th and December 31st, depending on when the QOF was established. If a QOF does not meet the investment standard, certain penalties may apply.
Notice 2020-39 provides that in the case of a QOF whose (i) last day of the first 6-month period of the taxable year or (ii) last day of the tax year falls within the period beginning on April 1, 2020, and ending on December 31, 2020, any failure by that QOF to satisfy the 90-percent investment standard for that taxable year of the QOF is due to the reasonable cause under IRC Section 1400Z-2(f)(3) and will be disregarded. This relief is automatic.
Other Notable Provisions
30-Month Substantial Improvement Period
Notice 2020-39 provides that for the purposes of the substantial improvement requirement with respect to property held by the QOF or QOZB, the period beginning on April 1, 2020 through December 31, 2020 is disregarded in determining the 30-month substantial improvement period.
Working Capital Safe Harbor
Notice 2020-39 provides that all QOZB’s with assets under a working capital safe harbor plan in place before December 31, 2020, “receive not more than an additional 24 months to expend the working capital assets of the qualified opportunity zone business”. This provision is available as long as the QOZB otherwise meets the requirements of Reg. Section 1.1400Z2(d)-1(d)(3)(v).
12-Month Reinvestment Period for QOFs
Notice 2020-39 provides that if any QOF’s 12-month reinvestment period, related to proceeds received by the QOF from the return of capital or the sale of some or all of the QOF’s qualified opportunity zone property, includes January 20, 2020, the date of the disaster identified in the Major Disaster Declaration, that QOF receives up to an additional 12-months to reinvest in qualified opportunity zone property. This provision is available if the QOF satisfies the requirements of Reg. Section 1.140000Z2(f)-1(b)(1), and invests the proceeds in a manner as originally intended before January 20, 2020.
For questions regarding this guidance, or any other questions regarding Qualified Opportunity Zones, please reach out to Terence Sullivan at 240.364.2583.