IRS issues COVID-19 tax relief for Qualified Opportunity Funds and investors
In June, it was announced that Qualified Opportunity Funds (QOFs) and Qualified Opportunity Zones (QOZ) would be next in line for pandemic relief from the IRS in Notice 2020-39. These programs have been popular since the passage of the Tax Cuts and Jobs Act because of the significant capital gains savings they can provide for rehabilitating distressed areas. More information on opportunity zones can be found in our past articles. During the pandemic, however, investors have found it difficult to keep up some of the complex requirements of these programs.
In their relief effort, the IRS is temporarily easing some of the components necessary to adhere to these programs normally providing much-needed flexibility for investors. These eased measures include:
QOF timeline extension – Taxpayers whose 180th day to invest their eligible gain in a QOF falls between April 1, 2020, and Dec. 31, 2020, now have until Dec. 31, 2020. This potentially expands the period by nine months depending on the taxpayer’s timeline. (This was previously only extended to July 15, 2020)
Safe harbor extension – Qualified Opportunity Zone Businesses (QOZB) will be covered by the working capital safe harbor before Dec. 31, 2020, extending the typical 31-month safe harbor by an additional 24 months to expend the working capital assets for businesses in a federally declared disaster area. Any working capital held before Dec. 31, 2020, applies. Additionally, the normal 62-month cap for this safe harbor may be extended by an additional 24 months.
Improvement Property Period extension – Contributions typically made during the 30-month substantial improvement period are suspended from April 1, 2020, through Dec. 31, 2020, potentially providing QOFs and QOZBs with an additional nine months to double its basis in the property.
Testing flexibility – Normally a QOF would need to hold at least 90% of its assets in a QOZ property during a semiannual test. However, the IRS is noting any failure to do so from April 1, 2020, to Dec. 31, 2020, to be of reasonable cause and therefore does not prevent qualifying as a QOF. This applies to funds using the 2020 calendar year and for tax years that include testing dates between April 1, 2020, and Dec. 31, 2020.
Reinvestment period extension – For QOFs with a 12-month investment period that included Jan. 20, 2020, an additional 12 months is available to reinvest in QOZ property provided the proceeds are invested as intended before the federally declared disaster.
Reach out for assistance with these new measures if you’re involved in a QOF.