IRS Eases Timing Requirements Around Qualified Opportunity Funds in Response to COVID-19

On June 4, 2020 the IRS released Notice 2020-39 which provides relief to Qualified Opportunity Funds (QOFs) and their investors as well as clarifying certain relief provisions under section 1400Z-2 of the Internal Revenue Code (IRC).

SC&H’s Key Takeaways

  • Taxpayers with eligible gains may have until the end of 2020 to reinvest them in QOFs
  • The period between April 1, 2020 and December 31, 2020 is disregarded for purposes of the 30 month “substantial improvement” test
  • The COVID-19 Pandemic will be treated as a “reasonable cause” with respect to a QOFs failure to meet the 90% Qualified Opportunity Zone (QOZ) Property test
  • Projects making use of the working capital safe harbor have up to an additional 24 months to expend working capital assets in a Qualified Opportunity Zone Business
  • QOFs which sell their QOZ Property have an extra 12 months to reinvest proceeds in replacement QOZ Property

Taxpayers who have taxable gains generally have 180 days to reinvest those in QOFs in order to defer tax. For taxpayers whose 180-day reinvestment window would have ended between April 1, 2020 and December 31, 2020, the reinvestment period is now extended until December 31, 2020. Note, Notice 2020-23 previously postponed the 180-day period through July 15, 2020 for some taxpayers.

In addition, QOFs are generally required to either be the original users of tangible QOZ Property (i.e. it must be new property) or the QOZ Property must be “substantial improved” during the 30-month period after the property was acquired. This notice removes the period from April 1, 2020 through December 31, 2020 from the calculation of the 30-month period. Thus, QOFs may effectively have as many as 39 months to substantially improve QOZ Property.

Another test QOFs must generally satisfy is the requirement to hold 90% of their assets in QOZ Property. This 90% requirement is calculated and tested on a semi-annual basis. This Notice provides that for any semi-annual testing date(s) between April 1, 2020 and December 31, 2020 the COVID-19 Pandemic represents a “reasonable cause” under IRC 1400z-2(f) for failing the test.

Some QOFs make use of the QOZ Business 31-month working capital safe harbor under the 1400Z regulations in order to avoid holding too many assets attributable to nonqualified financial property. This Notice provides up to an additional 24 months for QOFs to expend funds intended to be covered by the working capital safe harbor before December 31, 2020.

Lastly, QOFs that sell qualified property or receive distributions of QOF Stock or Partnership interest as a return of capital generally have 12 months to reinvest the funds in order to maintain QOF treatment. QOF’s whose 12-month reinvestment period includes January 20, 2020 (i.e. the date the COVID-19 Pandemic was identified in a Major Disaster Declaration) are eligible for up to an additional 12 months to reinvest in replacement QOZ Property.

The rules and regulations surrounding Qualified Opportunity Zones and Qualified Opportunity Funds are very complex. SC&H has experts that can guide you through the complexity so that you can avoid making critical mistakes. If you have any questions or need assistance, please reach out to us directly through our website.