On June 4, 2020, the IRS issued additional guidance in Notice 2020-39 for Qualified Opportunity Funds (QOFs) in further response to the coronavirus pandemic. The Notice provides relief from certain requirements under the Internal Revenue Code of 1986, as amended (Code) and the regulations thereunder. The Notice provides some important flexibility and deadline extensions for taxpayers and QOFs.
For investors, taxpayers who sold their property for an eligible gain and whose 180th day to invest in a QOF making investments in qualified opportunity zone (QOZ) property in order to defer their gain fell between April 1 and December 31, 2020, now have until December 31, 2020, to invest that gain in a QOF. In a previous Notice, the 180th day had been postponed for some taxpayers until July 15, 2020. This relief automatically applies. However, taxpayer will still need to make a valid deferral election and file a completed Form 8949 and Form 8997 with the taxpayer’s timely filed Federal income tax return (including extensions) for the tax year in which the deferred gain would be recognized.
For QOF and QOZ Business (QOZB) qualification purposes, the Notice provides that the period between April 1, 2020, and December 31, 2020, is disregarded for purposes of complying with the 30-month period during which property may be substantially improved.
The Notice also provides that a QOF’s failure to hold less than 90% of its assets in qualifying QOZ stock, partnership interests or business property on any semi-annual testing date between April 1 and December 31, 2020, is due to reasonable cause (the coronavirus pandemic) and will not prevent qualification as a QOF or an investment in a QOF from being a qualified investment. This means that QOFs will not be liable for the statutory penalty under the qualified opportunity zone provisions of the Code.
Further, due to the coronavirus pandemic, the Notice states that QOZB projects that meet the requirements of the 31-month working capital safe harbor under the regulations as of December 31, 2020 have up to an additional 24 months to expend their working capital. Thus, the applicable period to expend the designated working capital is extended to up to 55 months from the date of the designated working capital funds are first received. If the QOF or QOZB receives additional working capital that is also designated under a safe harbor designation, the period to expend this additional designated working capital is extended to up to 86 months from the date of first receipt of the originally designated working capital funds.
Moreover, QOFs that made qualified investments in QOF stock, partnership interests of QOZ business property before January 20, 2020, and that have received distributions or do receive distributions of QOF stock or partnership interests as a return of capital or realized proceeds from the sale of that stock, partnership interest or QOZ business property now have a total of 24 months (rather than 12 months) from the date of such distribution or sale in which to reinvest those amounts.
For more information about QOFs and the most recent guidance concerning tax relief resulting from the coronavirus pandemic, please contact a member of the Hirschler team.