To meet the compliance requirements of the Qualified Opportunity Zone (“QOZ”) program, Qualified Opportunity Funds (“QOFs”) and their investors must meet specific deadlines. In recognition of the economic disruption caused by the coronavirus pandemic, the IRS extended many of these deadlines in Notice 2020-39 issued in June, 2020. In its most recent guidance, Notice 2021-10 issued on January 20, 2021, the IRS further extended these deadlines.
180-Day Reinvestment Period: Taxpayers are required to reinvest capital gains in a QOF within 180-days after the gain is realized from a sale or exchange. Under the latest guidance, if the last day of the 180-day period falls on or after April 1, 2020 and before March 31, 2021, the last day of the investment period is automatically extended to March 31, 2021. Under previous guidance, the last day of the investment period had been extended only through December 31, 2020.
30-Month Substantial Improvement Period for QOFs: For tangible property to be treated as qualified opportunity zone business property the original use of post-2017 acquired tangible property in the qualified opportunity zone must begin with the QOF (the “original use requirement”), or the QOF must substantially improve that property (the “substantial improvement requirement”). To meet the substantial improvement requirement, the aggregate additions to the basis of the property must exceed the QOF’s adjusted basis of that property as of the beginning of the 30-month substantial improvement period. In other words, the QOF must double its cost in the tangible property.
Under the new guidance, the 30-month period during which property held by a QOF or qualified opportunity zone business must be substantially improved is disregarded during the period beginning on April 1, 2020 and ending on March 31, 2021. That 12 month period is ignored for purposes of counting the 30 months. This effectively extends the 30-month period by 12 months. Under previous guidance, the disregarded period was from April 1, 2020 through December 31, 2020.
90-Percent Investment Standard: The latest guidance provides that if a QOF fails to hold 90 percent of its assets in qualified opportunity zone property on any semi-annual testing date that falls on or after April 1, 2020 and ends on or before June 30, 2021, it is deemed to be due to reasonable cause as a result of the Coronavirus pandemic. Therefore, the failure to meet the 90-percent asset test during this period does not impact the entity’s status as a QOF or prevent an investment in the QOF from being a qualified investment. Penalties resulting from the failure to meet the 90 percent asset test are waived. Under the previous guidance, the waiver on the 90 percent asset test ended on December 31, 2020.
Working Capital Safe Harbor for Qualified Opportunity Zone Businesses (“QOZBs”): Qualified opportunity zone businesses have 31 months to spend working capital assets (i.e., typically cash). Under the new guidance, QOZBs holding working capital intended to be covered by the 31-month safe harbor before June 30, 2021 receive up to an additional 24 months to spend the working capital on qualifying property. The maximum safe harbor period may not exceed more than 55 months (86 months for start-up businesses). Under the previous guidance, the extension applied to working capital held before December 31, 2020.
12-Month Reinvestment Period for QOFs: If a QOF sells or disposes some or all of its qualified opportunity zone property, or receives a return of capital distribution from qualified opportunity zone stock - and if the QOF reinvests the proceeds in qualified opportunity zone property by the last day of the 12-month period beginning on the date of distribution, sale, or disposition - then the proceeds, to the extent that they are reinvested, are treated as qualified opportunity zone property for purposes of the 90-percent asset test.
Under the new guidance, if any part of the 12-month period includes June 30, 2020, the reinvestment period is extended up to an additional 12 months. Previously, the 12-month extension applied to the 12-month period that included January 20, 2020.
For more on how these extensions affect your deadlines, contact your Friedman advisor today.