The Tax Cuts and Jobs Act of 2017 (the TCJA) introduced the qualified opportunity zone program (the OZ Program), a tax-incentive program designed to encourage investment in low-income communities. The OZ Program requires investors and businesses to comply with a number of time-sensitive deadlines. However, the IRS recently released guidance extending certain deadlines for investors and businesses participating in the OZ Program, to reflect current economic uncertainty.
180-Day Rollover Period
- Generally, a taxpayer must invest eligible gain in a qualified opportunity fund (a QOF) within 180 days of the sale or exchange in order to qualify for the benefits of the OZ Program. In earlier guidance, the IRS provided that if the 180-day investment period would have expired between April 1, 2020 and July 14, 2020, the deadline was extended to July 15, 2020.
- New IRS guidance provides that if the 180-day investment period would have expired between April 1, 2020 and December 31, 2020, the new deadline for investment automatically is extended to December 31, 2020. Note that more beneficial rollover rules may already apply in some situations. For example, if the taxpayer realizing the gain to be rolled over is a pass-through entity (e.g., partnership or S corporation) that does not elect to roll over the gain at the entity level, then the owners (e.g., partners in the partnership or shareholders in the S corporation) can elect to roll over the gain. In such situations the pass-through entity owners typically will have until 180 days after the end of the entity's tax year to roll over their gain into a QOF.
QOF 90% Test
- Under the OZ Program requirements, at least 90% of the assets of a QOF must be invested in "Qualified Opportunity Zone Property." The QOF must satisfy the 90% test on both the last day of the first 6-month period of the taxable year of the QOF and the last day of the taxable year of the QOF. Failure to comply with the 90% test results in a penalty imposed on the QOF.
- New IRS guidance provides that if (i) the last day of the QOF's 6-month period or (ii) the last day of the QOF's taxable year falls between April 1, 2020 and December 31, 2020, any failure to satisfy the 90% test is automatically disregarded and no penalty will be imposed. Although relief is automatic, the QOF nonetheless must accurately complete its Form 8996 for 2020, even if such completion would show a failure to satisfy the 90% test; if such a failure is shown, that the QOF should place a "0" in Part IV, Line 8 (Penalty).
Substantial Improvement
- The OZ Program requires that, to qualify as opportunity zone property, the original use of the property must commence with the QOF (or subsidiary), or the QOF (or subsidiary) must substantially improve the property. To "substantially improve" a property, during a 30-month period a QOF (or its subsidiary) must make additions to its basis with respect to the property in the hands of the QOF (or subsidiary) that exceed its basis in the property at the beginning of the 30-month period.
- The new IRS guidance provides that the period from April 1, 2020 to December 31, 2020 is ignored for determining whether a QOF (or a subsidiary) has substantially improved the subject property. Accordingly, if a QOF's 30-month substantial improvement period began on January 1, 2020, the QOF's 30-month substantial improvement period would end on March 31, 2023 (rather than June 30, 2022).
Working Capital Safe Harbor
- Qualified opportunity zone businesses must comply with certain asset tests that restrict the amount of cash that can be held in reserve by such business. However, there is a "Working Capital Safe Harbor" in the Regulations that protects against a violation of the test for cash or other investments held in compliance with safe harbor requirements. The safe harbor is available for businesses that acquire, construct, or rehabilitate tangible business property (including real property) and for any entities that are developing a trade or business in the opportunity zone. Such businesses can hold cash for a period of up to 31 months if (1) there is a written plan that identifies the cash as held for the acquisition, construction, or substantial improvement of opportunity zone property or the development of a trade or business in an opportunity zone; (2) there is a written schedule showing that the cash will be used within 31 months; and (3) the business substantially complies with the written schedule. An extra 24-month period is added to the general 31-month period if the project is located in a federally declared disaster area and the project is delayed because of such disaster.
- New IRS guidance provides that the extra 24-month period described above is available for all qualified opportunity zone businesses holding working capital assets before December 31, 2020, provided that the business complies with the other requirements described above. Thus, a qualified opportunity zone business that has satisfied the requirements for a written plan and schedule now has an additional 24 months (for a total of 51 months from the date of the original funding of the business) to expend its funds in compliance with the safe harbor.
Reinvestment
- A QOF is allowed 12 months from the date of the distribution, sale, or disposition of qualified opportunity zone stock, qualified opportunity zone partnership interests, or qualified opportunity zone business property to reinvest proceeds from such transaction in other qualifying property.
- New IRS guidance provides that, if any QOF's 12-month reinvestment period includes January 20, 2020, the QOF may extend such period by an additional 12 months, provided that the QOF invests the proceeds in the manner originally intended by the QOF before January 20, 2020 and otherwise complies with the reinvestment requirements.