Don Warrant, CPA
Director | Tax Practice
On January 20, 2021, the IRS released Notice 2021-10 to provide additional relief to Qualified Opportunity Funds (“QOF”) and their investors in response to the ongoing COVID-19 pandemic. Specifically, this notice provides relief for QOFs and their investors in connection with the following:
- 180-Day Investment Requirement for QOF Investors
- 30-Month Substantial Improvement Period for QOFs
- 90-Percent Investment Standard for QOFs
- Working Capital Safe harbor for Qualified Opportunity Zone Businesses
- 12-Month Reinvestment Period for QOFs
A. 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 QOF within a 180-day period, beginning on the date of such sale or exchange.
Notice 2021-10 postpones to March 31, 2021, any deadline for the 180-day investment requirement that otherwise would have occurred on or after April 1, 2020, and before March 31, 2021.
Taxpayer’s still need to make a valid deferral election in accordance with the instructions to Form 8949, complete Form 8997, and file the completed Form 8949 and Form 8997 with a timely filed Federal income tax return (including extensions) or amended Federal income tax return for the taxable year in which the gain would be recognized.
B. 30-Month Substantial Improvement Period for Qualified Opportunity Funds
The original use of post-2017 acquired tangible property in the Qualified Opportunity Zone (“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 March 31, 2021.
C. 90-Percent Investment Standard for Qualified Opportunity Funds
A 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 June 30, 2021, any failure to satisfy the 90-percent investment standard for that taxable year of the QOF is granted reasonable cause for such failure.
D. 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 June 30, 2021, receive up to an additional 24 months to expend the working capital assets provided the requirements for the WCSH are otherwise met.
E. 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 June 30, 2020, then the QOF receives up to an additional 12 months to reinvest the proceeds, provided the other conditions are met.