Opportunity Zones Explained: IRS Guidance Updates

By Don Warrant, CPA on June, 24 2020
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Don Warrant, CPA

Director | Tax Practice

FM Opp Zones

On June 4, 2020, the IRS released Notice 2020-39 which provides relief under the federal Qualified Opportunity Zone (“QOZ”) program as follows:

  • 1.) 180-Day Investment Requirement for QOF Investors
  • 2.) 90-Percent Investment Standard for QOFs
  • 3.) Working Capital Safe harbor for QOZ Businesses
  • 4.) 30-Month Substantial Improvement Period for QOFs
  • 5.) 12-Month Reinvestment Period for QOFs

Qualified Opportunity Zones and COVID-19 Emergency Declaration

On March 13, 2020, the President issued an emergency declaration in response to the ongoing COVID-19 pandemic instructing the Secretary of the Treasury “to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, as appropriate, pursuant to 26 USC 7508A(a).” Subsequently, major disaster declarations were issued by the President stating that, beginning on January 20, 2020, major disasters existed in all 50 states, the District of Columbia, and the 5 territories. 

On April 9, 2020, Treasury and the IRS issued Notice 2020-23 to provide relief under section 7508A(a) to taxpayers affected by the COVID-19 emergency by postponing due dates with respect to certain taxpayer and government acts. Specifically, for certain time-sensitive actions due to be performed on or after April 1, 2020 and before July 15, 2020.

(1) 180-Day Investment Requirement for Qualified Opportunity Fund Investors

A taxpayer can elect to defer the recognition of eligible gain from the sale or exchange of property with an unrelated person, by investing the gain to be deferred in a Qualified Opportunity Fund (“QOF”) within a 180-day period, beginning on the date of such sale or exchange. 

Notice 2020-23 postponed to July 15, 2020, any deadline for the 180-day investment requirement that otherwise would have occurred on or after April 1, 2020 and before July 15, 2020. 

Notice 2020-39 postpones to December 31, 2020, any deadline for the 180-day investment requirement that otherwise would have occurred on or after April 1, 2020 and before December 31, 2020. 

(2) 90-Percent Investment Standard for Qualified Opportunity Funds

A Qualified Opportunity Fund (“QOF”) is required to hold at least 90 percent of its assets in QOZ property, determined by the average of the percentage of QOZ property held by the QOF on (i) the last day of the first 6-month period of the taxable year of the QOF, and (ii) on the last day of the taxable year of the QOF. This is referred to as the 90-percent investment standard. A penalty can be imposed for each month in which the QOF fails to meet this standard unless it is shown that such failure is due to reasonable cause.

If the last day of the first 6-month period of the taxable year or the last day of the taxable year falls within the period beginning on April 1, 2020, and ending on December 31, 2020, any failure to satisfy the 90-percent investment standard for that taxable year of the QOF is granted reasonable cause for such failure.   

(3) Working Capital Safe Harbor for Qualified Opportunity Zone Businesses

A QOZ business is required to meet a 5-percent nonqualified financial property test on each semi-annual testing date. Under this test, less than 5-percent of the average of the aggregate unadjusted bases of the entity’s property may be attributable to nonqualified financial property.  The working capital safe harbor (“WCSF”) excludes reasonable amounts of working capital that are held in cash, cash equivalents, or debt instruments with a term of 18 months or less. 

Under the WCSH, there must be a written schedule consistent with the ordinary start-up of a trade or business for the expenditure of the working capital assets within 31 months of receipt by the business. The 31-month period can be extended to a 62-month period under certain conditions.

All QOZ businesses holding working capital assets intended to be covered by the WCSH before December 31, 2020, receive up to an additional 24 months to expend the working capital assets provided the requirements for the WCSH are otherwise met.   

(4) 30-Month Substantial Improvement Period for Qualified Opportunity Funds

The original use of post-2017 acquired tangible property in the QOZ must begin with the QOF or QOZ business, or the QOF or QOZ business must substantially improve that property during any 30-month period beginning after the date of acquisition. Property is substantially improved when additions to basis with respect to such property in aggregate, exceed the adjusted basis of that property as of the beginning of that 30-month period.

The 30-month period is tolled for the period beginning on April 1, 2020, and ending on December 31, 2020.

(5) 12-Month Reinvestment Period for Qualified Opportunity Funds

For purposes of the 90-percent investment standard, a QOF has a 12-month period in which to reinvest proceeds received from the sale or other disposition of QOZ property, or a return of capital distribution from QOZ stock held by the QOF. This treatment is available to a QOF only to the extent that, prior to reinvestment in QOZ property, the reinvestment proceeds are continuously held in cash, cash equivalents, or debt instruments with a term of 18 months or less.

If the reinvestment period includes January 20, 2020, then the QOF receives up to an additional 12 months to reinvest the proceeds, provided the other conditions are met.  

Qualified Opportunity Zone Assistance and Guidance from Freed Maxick

The Freed Maxick COVID-19 Resource Center has a wealth of information and guidance on a wide range of topics related to tax relief and benefits, regulatory relief and benefits, and business continuity in the era of COVID-19. Click on the button to explore insights, observations and updates.

If you need additional opportunity zone guidance, we are available to discuss your issues and concerns. Connect with us here or call Freed Maxick at 716.847.2651.

Please keep in mind that due to the quickly-changing nature of the COVID-19 pandemic, you should always discuss changes with your Freed Maxick advisor or legal counsel.

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