On January 19, 2020, the IRS issued Notice 2021-10 (the “Notice”), which extends the relief for Qualified Opportunity Funds (QOF) and their investors provided for by Notice 2020-39. Notice 2020-39 announced various extensions of deadlines for QOFs and their investors due to COVID-19 pandemic, each of which are discussed here.

A summary of the extensions that are set forth in the Notice are summarized below:

180-Day Investment Period

Generally, taxpayers must reinvest 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 March 31, 2021, the last day of the 180-day investment period is automatically postponed to March 31, 2021. This relief is automatic. However, the taxpayer still needs to file all required forms (including amended returns to take advantage of this additional relief, if eligible capital gain was previously reported on a return).

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 June 30, 2021, 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 will be waived. Although the relief is automatic, the QOF must still accurately report its 90% investment testing results and input a “0” where any penalty is reported

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 (i.e. disregarded) during the period beginning on April 1, 2020 and ending on March 31, 2021.

Working Capital Safe Harbor for Qualified Opportunity Zone Businesses

The Notice provides relief for qualified opportunity zone businesses that hold working capital that is intended to be covered by the 31-month working capital safe harbor (which requires a written plan for the spending of the working capital and requires that the working capital must be held in cash, cash equivalents or short term debt obligations). The Notice grants up to an additional 24 months, including any relief provided under Notice 2020-39, for a maximum safe harbor period of not more than 55 months total (not more than 86 months total for start-up businesses), to spend the working capital on qualifying property, provided that the funds intended to be covered by the safe harbor were held prior to June 21, 2021.

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 zone property in other qualified opportunity zone property includes June 30, 2020, the reinvestment period is extended up to an additional 12 months, including any relief provided under Notice 2020-39, for a maximum reinvestment period of not more than 24 months total.

This blog will be updated when more information is available.

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Photo of Louis B. Schatz Louis B. Schatz

Louis Schatz is a partner in Shipman’s Tax and Employee Benefits Practice Group, and Chair of the State and Local Tax Group. From 2007 to 2017, Lou served on the firm’s seven-person Management Committee. He is the past Chair of the Tax Section…

Louis Schatz is a partner in Shipman’s Tax and Employee Benefits Practice Group, and Chair of the State and Local Tax Group. From 2007 to 2017, Lou served on the firm’s seven-person Management Committee. He is the past Chair of the Tax Section of the Connecticut Bar Association.

Lou practices in the areas of federal and State of Connecticut tax with attention to the representation of closely held businesses organized as limited liability companies, partnerships and S corporations; real estate joint ventures; and the representation of taxpayers involved in federal and Connecticut tax controversies (at the audit, appellate and court levels). He is a frequent lecturer on federal and State of Connecticut tax, partnership and limited liability company issues.

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Photo of Elva M. Saltzman Elva M. Saltzman

Elva Saltzman is an associate in the firm’s Tax and Employee Benefits Practice Group, where she assists clients in matters related to federal and state taxation. She has experience in tax planning, mergers and acquisitions, enforcement and collection defenses, and other federal and…

Elva Saltzman is an associate in the firm’s Tax and Employee Benefits Practice Group, where she assists clients in matters related to federal and state taxation. She has experience in tax planning, mergers and acquisitions, enforcement and collection defenses, and other federal and state tax controversies. Elva started her career in tax law at Shipman and then joined a Big Four accounting firm in its business tax services group, where she assisted private equity clients with tax compliance, before returning to the Shipman team.

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