Qualified Opportunity Zones, still one of the most significant incentives for U.S. taxpayers to leverage for income tax deferral and potentially permanent income exclusion, remain at the forefront for investors, business owners and real estate developers. In addition to providing an avenue for much-needed relief and improvement of economically distressed areas in the U.S., the U.S. Treasury recently approved relief as it relates to the coronavirus pandemic for those investors in qualified opportunity zones.
The following relief is provided for Qualified Opportunity Funds (QOFs) and investors affected by COVID-19, as stated in IRS Notices 2020-39 and 2021-10.
- 180-Day Investment Requirement: The deferral period to make investments in a QOF is extended. If a taxpayer’s 180th-day investment requirement falls between April 1, 2020 and March 31, 2021, the taxpayer has until March 31, 2021 to invest that gain in a QOF. The December extension does not apply to partnerships and S corporations that have a March 15 deadline.
- Reasonable Cause Exception: A QOF’s failure to pass the 90% investment standard test on any semiannual testing date from April 1, 2020 through March 31, 2021 will be considered to be due to reasonable cause and that failure will not prevent an entity from qualifying as a QOF or an investment in a QOF from being a qualifying investment.
- 12-Month Reinvestment Period: An additional 12 months for reinvestment is allowed if any of the QOF’s 12-month reinvestment period includes January 20, 2020 (the date of the disaster identified in the major disaster declarations related to COVID-19).
- Substantial Improvement: The 30-month substantial improvement for the period beginning on April 1, 2020 and ending on March 31, 2021 is suspended.
- Working Capital Safe Harbor (WCSH) for Qualified Opportunity Zone Businesses (QOZBs): Due to the COVID-19 Emergency Declaration, all QOZBs holding working capital assets intended to be covered by the WCSH before March 31, 2021 will receive no more than an additional 24 months to expend the working capital assets of the QOZB (as long as the QOZB meets the requirements for the WCSH).