Opportunity Zone Investors get COVID-19 Relief from the IRS

Smart Summary

  • The 180-day deadline for a taxpayer to defer capital gains tax by investing into a QOF is now postponed until December 31, 2020.
  • The penalty for a QOF’s failure to satisfy the 90% investment standard between April 1 and December 31, 2020, is now disregarded.
  • A QOZB may now extend the working capital safe harbor from 31 months to 55 months, until December 31, 2020.
  • The period between April 1 and December 31, 2020 is now disregarded in determining the 30-month timeline to complete substantial improvement of QOZBP.

Under Notice 2020-39, which was released on June 4, the IRS has relaxed certain timing and testing requirements for taxpayers, qualified opportunity funds (QOFs) and qualified opportunity zone property (QOZP), including both qualified opportunity zone businesses (QOZBs) and qualified opportunity zone business property (QOZBP). This relief is automatic, so taxpayers do not have to call the IRS or send letters or other documents to the IRS to receive this relief. However, Form 8949, Form 8997, and Form 8996 must still be timely filed with annual returns.

Updated Rules

Taxpayer 180-Day Period

The Rule: An individual taxpayer may defer capital gains tax on the sale of property to an unrelated person by reinvesting such gain into a QOF within 180 days from the date of sale.

The Update: If a taxpayer’s 180-day period ends between April 1 and December 31, 2020, then the last day of the taxpayer’s 180-day period is now further extended from July 15 (Notice 2020-23) to December 31, 2020.

QOF 90% Investment Standard

The Rule:A QOF must hold at least 90% of its assets in QOZP, determined by the average of the percentage of QOZP held by that QOF as measured (i) on 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. Failure to satisfy the 90% investment standard is subject to penalty, unless due to reasonable cause.

The Update: If a QOF’s 90% asset test is between April 1 and December 31, 2020, a failure to satisfy such investment standard due to reasonable cause is now disregarded. The QOF should enter “0” on Form 8996, Part IV, Line 8 (Penalty).

QOZB 31-Month Working Capital Safe Harbor

The Rule:A business entity must satisfy several elements to receive treatment as a QOZB, including a requirement to hold less than 5% of its assets in nonqualified financial property. A QOZB may establish a safe harbor exception to this stringent rule by establishing a written schedule for the expenditure of reasonable amounts of working capital within 31 months.

The Update: A QOZB relying on the working capital safe harbor before December 31, 2020, may now extend the 31-month written schedule for up to 55 months.

30-Month Substantial Improvement Period

The Rule:An investment into tangible business property must satisfy several elements to receive treatment as QOZBP. For already-constructed property, the cost of renovations must at least equal the purchase price (minus the land value) within a 30-month period.

The Update: The period between April 1 and December 31, 2020, is now disregarded for purposes of determining the 30-month substantial improvement period.

About Qualified Opportunity Funds

Generally, taxpayers are subject to a maximum capital gains tax rate of 20% that can be paid in the current tax year, or deferred until 2026 by investing such gain into a QOF. Investors are also eligible to apply for a 10% state income tax credit for investments made into an Ohio opportunity zone.

Investments made prior to 2022 are eligible to receive a 10% federal income tax break on the amount deferred while investments held for at least ten years are eligible for 100% tax-free treatment.

In 2019, Ohio taxpayers saved $240 million from taxation by investing into opportunity zones. A national estimate reports taxpayers have saved $10.1 billion from taxation as of April 2020.

Andrew Doup is a corporate attorney at Kegler Brown Hill + Ritter, advising investors, fund managers, developers, and entrepreneurs on investment finance and tax-advantaged opportunity zone transactions. He can be reached directly at [email protected] or (614) 462-5488.