IRS Announces New Relief for Qualified Opportunity Funds and Investors Impacted by COVID-19
June 12, 2020
As the COVID-19 pandemic and the economic downturn persist, the IRS continues to offer new forms of relief in an attempt to ease financial burdens and provide flexibility to taxpayers. On June 4, 2020 the IRS announced specific relief directed towards Qualified Opportunity Funds (QOFs) and investors participating in the Qualified Opportunity Zones (QOZ) program.
When the Tax Cuts and Jobs Act established the QOZ program, investors immediately took advantage of the new tax incentives the federal program provided for investing in riskier, more economically depressed areas. The program boasted potential significant capital gains savings, and its popularity spread quickly, along with the number of states willing to participate in the program. While the program can generate highly profitable investments, it also carries several rules and requirements that investors must abide by for their investments to qualify including committing to long holding periods, passing regular testing requirements, and abiding by strict timelines for property improvements and reinvesting gains.
The widespread economic impact of the pandemic has affected some investors’ ability to follow these requirements. The new relief from the IRS seeks to assist in QOZ investment qualification adherence and introduces the following temporary measures:
- QOF Investment timeline extension: Taxpayers now have until December 31, 2020, to invest their eligible gain in a QOF if their 180th day to invest falls between April 1, 2020, and December 31, 2020.
- Suspension from contributing toward the 30-month substantial improvement period for period of April 1, 2020, through December 31, 2020.
- Flexibility for the results of semiannual testing performed between April 1, 2020, and December 31, 2020, to evaluate QOF holdings: The IRS noted that if a QOF’s semiannual test fell during this period and revealed that the QOF failed to hold at least 90% of its assets in a QOZ property (a key requirement of the QOZ program), the IRS would consider the failure contributable to reasonable cause according to IRC Sec. 1400Z-2(f)(3). Failure by a reasonable cause will not prevent entities from qualifying as a QOF, nor will it disqualify an investment in a QOF.
- Extension for Qualified Opportunity Zone Businesses (QOZB) to be covered by the working capital safe harbor before December 31, 2020: The IRS is providing an additional 24 months to expend the working capital assets for QOZBs.
- Extended reinvestment period for QOFs: If a QOF’s 12-month reinvestment period included January 20, 2020, that QOF is now eligible for up to 12 additional months to reinvest in QOZ property.
These measures, as described in IRS Notice 2020-39, will have a substantial impact on the funds and entities as well as the individual investors participating in the QOZ program. The pandemic continues to have an unprecedented impact on the economy, so this additional relief provides much-needed flexibility in supporting QOFs and investors in QOZ property.
If you suspect these new measures will impact you, your investments, or your QOF, consider working with a knowledgeable Aprio advisor. Senior Tax Manager Angela Brown and Tax Manager Ross Boardman are both closely monitoring all regulations related to the QOZ program and are prepared to help you maximize your investments.
About the Author
Mitchell is the partner-in-charge of Aprio’s Tax practice as well as the Technology & Biosciences group. He has been a partner since 1990 with Aprio, which is the largest Georgia-based tax, accounting and consulting firm. Mitchell works with companies in the software, gaming, clean tech, financial technology (FinTech), health care IT, processing, biosciences (biotech and medical device) and manufacturing industries. Whether a company is pre-revenue, starting up, growing or preparing for a liquidity event, Mitchell works with them to maximize their potential at each stage. He is known for promoting research, innovation and entrepreneurship by enabling companies to be successful, regardless of where they are in their business lifecycle.