On June 5, 2020, the IRS issued Notice 2020-39 (the “Notice”), which announces various extensions of deadlines for Qualified Opportunity Funds (QOF) and their investors due to COVID-19 pandemic. A summary of the extensions that are set forth in the Notice are summarized below:
180-Day Investment Period
Generally, taxpayers must reinvestment capital gain in a QOF within 180 days after the gain is realized from a sale or exchange. The Notice provides that if the last day of the 180-day investment period falls on or after April 1, 2020, and before December 31, 2020, the last day of the 180-day investment period is automatically postponed to December 31, 2020. This relief is automatic. However, the taxpayer still needs to make a valid deferral election in accordance with the instructions to Form 8949, complete Form 8997, and file the completed Form 8949 and Form 8997 with a timely filed tax return, including extensions; or file an amended return for the taxable year the gain would have been recognized if the qualified opportunity zone did not defer the gain recognition.
90-Percent Investment Standard for QOFs
The Notice provides that a QOF’s failure to hold less than the 90% of its assets in qualified opportunity zone property on any semi-annual testing dates from April 1, 2020, through December 31, 2020, is deemed due to “reasonable cause” under Internal Revenue Code Section 1400Z-2(f)(3) and that such failure does not prevent qualification of an entity as a QOF or an investment in a QOF from being a qualifying investment. Thus, penalties arising under section 1400Z-2(f) due to such failure during this period should be waived.
30-Month Substantial Improvement Period for QOFs and Qualified Opportunity Zone Businesses
The Notice provides that the 30-month period during which property held by a QOF or qualified opportunity zone business must be substantially improved is tolled during the period beginning on April 1, 2020 and ending on December 31, 2020.
Working Capital Safe Harbor for Qualified Opportunity Zone Businesses
The Notice reminds taxpayers that qualified opportunity zone businesses holding working capital intended to be covered by the 31-month working capital safe harbor before December 31, 2020, will receive up to an additional 24 months to spend the working capital on qualifying property. This extension was previously allowed under the prior declaration of a Federally declared disaster relating to the COVID-19 pandemic effective on January 20, 2020.
12-Month Extension of Reinvestment Period for QOFs
The Notice also reminds taxpayers that if any part of the 12-month period during which a QOF may reinvest returns of capital and proceeds from the sale of qualified opportunity property in other qualified opportunity zone property includes January 20, 2020, the reinvestment period is extended up to an additional 12 months. This extension is allowed (again) under the regulations due to the disaster declaration.
This blog will be updated when more information is available.