On January 19, 2021, the Internal Revenue Service issued Notice 2021-10, further extending tax deadlines for Qualified Opportunity Funds (QOFs) and investors affected by the ongoing COVID-19 pandemic. The IRS had previously extended these deadlines in June 2020. The following information outlines new deadlines for taxpayers who have invested in Qualified Opportunity Zones (QOZs).
180-Day Investment Period
Ordinarily, any capital gains realized from a QOF are expected to be reinvested by taxpayers within 180 days of that sale or exchange. Last June, the IRS extended that 180-day investment period deadline to December 31, 2020. The deadline has now been extended to March 31, 2021, if the last day of the 180-day investment falls before March 31, 2021. This extension for investing gains and qualifying for the program’s tax benefits is automatic, but taxpayers still need to make a valid deferral election.
30-Month Substantial Improvement Period for QOFs
Under the new guidance, the 30-month period during which property held by a QOF or QOZ business must be substantially improved will be suspended (tolled) between April 1, 2020 and March 31, 2021 (previously December 31, 2020).
90-Percent Investment Standard for QOFs
If a QOF fails to hold 90 percent of its asset in a qualified opportunity zone property as a result of the pandemic during the testing date between April 1, 2020 and June 30, 2021, this failure will be regarded as due to a reasonable cause. For that reason, failure to satisfy the 90-percent test will not affect an entity’s status as a QOF, nor will it prevent an investment in the entity from being regarded as a qualified investment. Any penalties that would normally be imposed for failing to satisfy the 90-percent investment standard during this period will be waived. This relief is automatic but a QOF must still file an accurately completed tax return.
Working Capital Safe Harbor for Qualified Opportunity Zone Businesses
Qualified opportunity zone businesses that hold working capital assets they intended to be covered by the working capital safe harbor before June 30, 2021 will be granted an additional 24 months to spend those working capital assets on qualifying property, for a maximum safe harbor period of not more than 55 months total (not more than 86 months total for start-up businesses). This is allowed under QOF regulations, which state that extensions up to 24 months can be given provided the extension is due to a Federally declared disaster, like the pandemic.
12-Month Reinvestment Period for QOFs
QOFs may reinvest returns of capital and proceeds from the sale of qualified opportunity property in other QOZs during a 12-month period. As a result of the disaster declaration, if any part of that period includes June 30, 2020, the reinvestment period is extended up to an additional 12 months for a maximum reinvestment period of not more than 24 months total.
Smith & Howard’s real estate team works with business to help them understand and leverage qualified opportunity funds. For questions or assistance, please contact Chris Conrad or fill in the form below.