On January 19, 2021, the Internal Revenue Service (“IRS” or the “Service) issued Notice 2021-10 (the “2021 Notice”) extending relief measures first provided in Notice 2020-39 (the “2020 Notice”) related to investments by qualified opportunity funds (“QOFs”) in qualified opportunity zones (“QOZs”). This Client Alert summarizes the relevant provisions of the QOZ legislation in the Internal Revenue Code of 1986, as amended (the “Code”) and the Treasury Regulations promulgated thereunder (the “Regulations”) and the additional relief from deadlines in the 2021 Notice.
180 Day Investment Requirement for QOF Investors.
Taxpayers can defer gain from the sale or exchange of property to an unrelated person by reinvesting money up to the amount of such gain in a QOF within 180 days after the sale or exchange. The 2020 Notice provided that if the 180-day investment period’s last day fell on or after April 1, 2020, and before December 31, 2020, then the 180-day investment period’s last day would be postponed to December 31, 2020. The 2021 Notice extends this relief providing that if the 180-day investment period’s last day falls on or after April 1, 2020 and before March 31, 2021, then that 180-day investment period’s last day would be postponed to March 31, 2021. Although this relief is automatic, taxpayers still must make a valid deferral election on IRS Form 8949 and file that form and IRS Form 8997 with their timely filed or amended tax return for the taxable year in which the gain from the initial sale or exchange of property otherwise would have been recognized.
30 Month Substantial Improvement Period for QOFs.
QOZ business property must either begin its original use with the QOF or be substantially improved within 30 months after the QOF’s acquiring that property. The 2020 Notice provided that the period beginning on April 1, 2020 and ending on December 31, 2020 is disregarded in determining whether the 30-month period is met. The 2021 Notice extended the period; now, the period beginning on April 1, 2020 and ending on March 31, 2021 is now disregarded in determining whether the 30-month period is met.
90 Percent Investment Standard for QOFs.
A QOF, which is a corporation or partnership organized for the purpose of investing in QOZ property, must hold at least 90 percent of its assets in QOZ property (the “90 percent investment standard”). The Code provides that a QOF must average the percentage of qualified opportunity zone property held by it on the last day of the first 6-month period of its taxable year and on the last day of its taxable year to determine whether the QOF meets the 90 percent investment standard. A penalty applies for each month that QOF fails to meet the 90 percent investment standard, unless the failure is due to reasonable cause. The 2020 Notice provided that if the last day of the 6-month period or the taxable year end fell within the period beginning on April 1, 2020 and ending on December 31, 2020, then the QOF’s failure to satisfy the 90-percent investment standard would be both (i) deemed to be due to reasonable cause (ii) disregarded in determining whether the QOF meets the 90 percent investment standard. The 2021 Notice extends end of the period as to which a QOF’s failure to satisfy the 90-percent investment standard would be deemed due to reasonable cause and disregarded from December 31, 2020 until June 30, 2021. A QOF, however, must file IRS Form 8996 with its timely filed tax return for the affected taxable years, with a “0” in Part IV, Line 8 (Penalty), to receive this relief.
Working Capital Safe Harbor for QOZ Businesses.
QOZ businesses may have reasonable amounts of working capital held in cash, cash equivalents or debt instruments with a term of 18 months or less. The Regulations provide a safe harbor for what amounts of working capital are reasonable to be retained, including a written schedule consistent with the ordinary startup of a trade or business for the expenditure of the working capital assets within 31 months after receipt, or 62 months after receipt if certain additional requirements are met. The 2020 Notice gave businesses an additional 24 months to qualify for the working capital safe harbor if they held working capital assets intended to satisfy the safe harbor before December 31, 2020. The 2021 Notice extended the holding period for this safe harbor until June 30, 2021.
12 Month Reinvestment Period for QOFs.
If a QOF sells or disposes of some of its QOZ property or receives a distribution with respect to QOZ stock that is a return of capital, then proceeds reinvested in QOZ property by the last day of the 12-month period beginning on the date of the distribution with respect to QOZ stock or sale or disposition of QOZ property are treated as QOZ property for purposes of the 90 percent investment standard. The 2020 Notice extended the 12-month reinvestment period for QOFs having a 12-month reinvestment period that included January 20, 2020. The 2021 Notice provides a similar 12-month extension for QOFs having a 12-month reinvestment period that includes June 30, 2020.
This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This alert is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. We are working diligently to remain well informed and up to date on information and advisements as they become available. As such, please reach out to us if you need help addressing any of the issues discussed in this alert, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.
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