As a result of the COVID-19 pandemic, the Internal Revenue Service (IRS) recently extended several deadlines. Taxpayers who have invested in qualified opportunity funds should take note of the following changes.
180-Day Investment Period
Taxpayers are generally expected to reinvest any capital gains they make from a qualified opportunity fund (QOF) within 180 days of realizing that gain from a sale or exchange. According to IRS guidance 2020-39, if the last day of the 180-day investment period falls on or after April 1, 2020 and before December 31, 2020, the new last day of the investment period will now be December 31, 2020.
90-Percent Investment Standard
If a QOF fails to hold 90 percent of its asset in a qualified opportunity zone property on any semi-annual testing date that falls between April 1, 2020 and December 31, 2020, the guidance provides that this failure is due to reasonable cause because of the pandemic. 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.
30-Month Substantial Improvement Period Suspended
Under the new guidance, the 30-month period during which property held by a QOF or qualified opportunity zone business must be substantially improved will be suspended (tolled) between April 1, 2020 and December 31, 2020.
Working Capital Safe Harbor Spending Deadline
Qualified opportunity zone businesses that hold working capital assets they intended to be covered by the 31-month working capital safe harbor before December 31, 2020 will be granted an additional maximum of 24 months to spend those working capital assets on qualifying property. 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 Extension of Reinvestment Period for QOFs
QOFs may reinvest returns of capital and proceeds from the sale of qualified opportunity property in other qualified opportunity zones during a 12-month period. As a result of the disaster declaration, if any part of that 12-month period includes January 20, 2020, the reinvestment period is extended up to an additional 12 months.