IRS Notice 2021-10: Relief Provisions Announced for Investors in Qualified Opportunity Funds
By: Martin Karamon, Rick Schneider and Joe Poore
This week the IRS announced relief provisions for investors in Qualified Opportunity Funds (“QOFs”) and for the QOFs and Qualified Opportunity Zone Businesses (“QOZBs”).
Under IRS Notice 2021-10, certain previously extended deadlines for investors in Qualified Opportunity Zones have been further extended to March 31, 2021, or later (see prior Notices 2020-39 and 2020-23).
Extension of 180-Day Investment Period
- In general, a taxpayer may elect to exclude capital gains from gross income to the extent such gains are invested in a QOF during the 180-day period beginning on the date of the sale or exchange.
- Under Notice 2021-10, for any 180-day period ending on or after April 1, 2020, and before March 31, 2021, the deadline for investment of capital gains is extended to March 31, 2021.
- For gain recognized by an individual from October 4, 2019 through October 2, 2020, the deadline to invest is March 31, 2021.
- For gain reported on a Schedule K-1, the March 31, 2021 deadline applies to any gain recognized by the partnership on or after January 1, 2019.
- A taxpayer with gain reported on a Schedule K-1 (associated with a 2019 return) can elect to begin the 180-day period on the pass through entity’s tax return (beginning March 15, 2020 and ending on September 11, 2020).
- The September 11, 2020 date falls within the window of April 1, 2020 through March 30, 2021, thus, allowing for an investment deadline of March 31, 2021.
Extension of QOZB Working Capital Safe Harbor
- In order to be considered a QOZB, an entity needs to be engaged in a trade or business in which at least 70 percent of its tangible property is considered Qualified Opportunity Zone Business Property (“QOZBP”).
- QOZBP is tangible property used in the QOZB’s trade or business that was acquired by purchase from an unrelated person after December 31, 2017.
- All QOZBs must hold less than five percent of its assets in nonqualified financial property. Excluded from nonqualified financial property are reasonable amounts of working capital held in cash, cash equivalents, and certain debt instruments, which are not tangible property, as “reasonable working capital” under “safe harbor” rules.
- To be determined reasonable under the safe harbor rules, the QOZB must have a written plan identifying the working capital assets it holds for the development of a trade or business within the QOZ, there must be a schedule for the expenditure of working capital in 31 months of receipt, and the working capital must be used in a manner consistent with the schedule.
- A QOZB can obtain additional 31-month Working Capital Safe Harbor Periods for subsequent infusions of Working Capital Assets for an overall period of 62 months from the date of the original infusion of Working Capital Assets.
- Under Notice 2021-10, all QOZB’s holding working capital assets intended to be covered by the working capital safe harbor before June 30, 2021, receive up to an additional 24 months (see Notice 2020-39 for prior rules) to expend the working capital into the business.
30-Month Substantial Improvement Period for Pre-Existing Tangible Property
- In order to be QOZBP, pre-existing tangible property located in a QOZ must be substantially improved by the QOF within a 30-month period.
- Under Notice 2021-10, the 30-month substantial improvement period is tolled from April 1, 2020 through March 31, 2021.
90-Percent Asset Test
- A QOF must hold at least 90 percent of its assets in QOZBP.
- The percentage of QOZP held by a QOF is measured twice per year: (1) On the last day of the first six-month period of the QOF’s tax year, AND (2) on the last day of the QOF’s tax year.
- Under Notice 2021-10, a QOF that fails the 90-percent asset test whose last day of the first six-month period of a tax year, OR whose last day of the tax year falls between April 1, 2020 and June 30, 2021 is deemed to fail due to reasonable cause. Thus, no penalties will be assessed against the QOF for failing to meet the asset test.
12-Month Reinvestment Period
- If a QOF sells or disposes QOZP, but reinvests the proceeds back into QOZP by the last day of the 12-month period beginning on the date of the disposition, then the proceeds are classified as QOZP for purposes of the 90-percent asset test.
- Under Notice 2021-10, if a QOF’s 12-month reinvestment period includes June 30, 2020, the QOF receives an additional 12 months, but never more than 24 months in total (including extensions provided in Notice 2020-39 relief provisions) to reinvest the proceeds in QOZP.