Deadlines Postponed for Qualified Opportunity Funds and Their Investors
The IRS recently announced various postponements of deadlines for Qualified Opportunity Funds (“QOFs”) and their investors due to the COVID-19 pandemic. Below is a summary highlighting the relief provisions in Notice 2020-39.
180-day investment period ending on or after April 1, 2020, postponed to December 31, 2020.
Taxpayers must generally reinvest gains in a QOF within 180 days after the gain is realized from a sale or exchange. Pursuant to Notice 2020-39, if the last day of the 180-day reinvestment period falls on or after April 1, 2020, and before December 31, 2020, the last day of the reinvestment period is automatically postponed until December 31, 2020.
12-month postponement of reinvestment period for QOFs.
QOFs generally have 12 months to reinvest returns of capital and proceeds from the sale of qualified opportunity zone (“QOZ”) property in other QOZ property. Notice 2020-39 provides that if any part of the 12-month period during which the QOF may reinvest proceeds from the sale of QOZ property in other QOZ property includes January 20, 2020, the reinvestment period is postponed up to an additional 12 months.
90-percent investment standard temporarily relaxed for QOFs that fail to meet such standard.
A QOF must generally hold at least 90 percent of its assets in QOZ property as of each semi-annual testing date of the QOF’s taxable year. This requirement is referred to as the “90-percent investment standard.” Generally, the QOF must pay a penalty for each month that it fails to meet that standard. However, no such penalty is imposed with respect to any failure if it is shown that such failure is due to reasonable cause.
Notice 2020-39 provides that a QOF’s failure to satisfy the 90-percent investment standard on any semi-annual testing date that falls on or after April 1, 2020, and on or before December 31, 2020, is due to reasonable cause on account of the COVID-19 pandemic. This relief will not affect the entity’s status as a QOF or prevent an investment in the entity from being a qualified investment, and any applicable penalties will be waived.
30-month substantial improvement period temporarily suspended.
For purposes of the 30-month substantial improvement period with respect to property held by a QOF or QOZ business, the period beginning April 1, 2020, and ending on December 31, 2020, is disregarded in determining any 30-month period.
24-month extension of working capital safe harbor deadline.
Under Notice 2020-39, QOZ businesses holding working capital that was intended to qualify under the 31-month (or 62-month in certain cases) working capital safe harbor prior to December 31, 2020, have been granted up to an additional 24-month extension to spend such working capital on qualified expenditures. As a result, QOZ businesses in specific cases can have up to 86 months in which to invest working capital into the business.
The IRS provides welcome relief with the issuance of Notice 2020-39 for QOFs and their investors in response to the ongoing COVID-19 pandemic. For additional information about how this guidance may impact your investment in a QOF or the requirements that a QOF must meet, please contact Rick Schneider or Michael Elliot.