January 26, 2021
New Extensions for Opportunity Zone Investments
The Consolidated Appropriations Act, 2021, passed in late December provided many Atlanta businesses and nonprofit organizations with much needed financial and tax relief. While helpful, the new Biden Administration believes more is needed and is proposing a new $1.9 Trillion package to broaden the scope of assistance. The continued focus on economic relief makes it clear just how devastating the pandemic has been on the economy. While Congress and the White House work out the details of another rescue package, the IRS has also been making changes to provide relief to taxpayers. On January 19th, the IRS issued Notice 2021-10 which extends several deadlines originally outlined in IRS Notice 2020-39 governing Qualified Opportunity Zone (QOZ) investments. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key points below.
- 180 Day Investment Requirement –Typically a taxpayer can exclude capital gains from gross income for the sale to, or exchange with an unrelated person, held in a Qualified Opportunity Fund (QOF) during the 180-day period after investment. The new guidance states that if the last day of the investment period falls on, or after, April 1, 2020, and before March 31, 2021, then the investment period is automatically extended until March 31, 2021.
- 30 Month Substantial Improvement – Tangible property is treated as a Qualified Opportunity Zone Business (QOZB) if, among other things, it is substantially improved within 30 months. The new guidance states that the dates between April 1, 2020, and March 31, 2021, will be disregarded when determining whether the 30-month substantial improvement requirement has been met.
- 90% Investment Standard – A QOF is required to hold at least 90% of assets in a Qualified Opportunity Zone (QOZ) property. According to the IRS, this is determined by the QOZ property held on the last day of the first six-month period and the last day of the tax year for the QOF. The new guidance permits those who fail to meet the standard for the period beginning on April 1, 2020, through June 30, 2021, will be considered due to cause. The change essentially protects these businesses from being assessed penalties.
- Working Capital Safe Harbor – Under existing regulations, a QOZB is permitted to claim any amount of working capital as reasonable for up to 31 months under certain conditions. One of these conditions is that a written schedule consistent with the ordinary business startup expenses be made and followed over 31 months. The guidance extends this to 62 months total. If a business is located in a federally declared disaster zone, which all are because of the COVID-19 disaster, then an additional 24 months is permitted. This means QOZBs now have up to 86 months in which to take advantage of the safe harbor.
- 12 Month Reinvestment Period – If a QOF sells QOZ property or when a distribution from the property is recognized as a return on capital, and if the money is reinvested in a QOZ property by the last day of the 12-month period, then proceeds are treated as QOZ property for purposes of the 90% investment standard. The new guidance states that any QOF’s reinvestment period that includes June 30, 2020, can have an additional 12 months, on top of the 12-month relief previously granted, for a total extended reinvestment period of 2 years.
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These extensions offer an additional dimension of relief for Atlanta Qualified Opportunity Funds, Qualified Opportunity Zone businesses, and investors. Given the complexity of QOZ rules and regulations, it is important to consult with a qualified advisor to determine the impact on your situation. If you have questions about the information outlined above or need assistance with a real estate tax, accounting, or audit issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.
