Further COVID-Related Extensions to Opportunity Zone Timing Rules

IRS has issued Notice 2021-10 providing for additional extensions of time for investors to make Opportunity Zone (OZ) investments and for OZ funds to satisfy certain timing requirements. This continues Treasury’s liberal approach to pandemic-related extensions of temporal OZ requirements. Among the recently announced extensions are the following:

180-Day Investment Period for Investors.  If the last day of the 180-day investment period within which a taxpayer must make an investment in an OZ fund in order to satisfy the 180-day investment requirement falls on or after April 1, 2020, and before March 31, 2021, the last day of that 180-day investment period is postponed to March 31, 2021. This relief is automatic; taxpayers do not have to call the IRS or send letters or other documents to the IRS to receive this relief. However, a taxpayer will still need to make a valid deferral election in accordance with the instructions to Form 8949, complete Form 8997, and file the completed Form 8949 and Form 8997 with a timely filed Federal income tax return (including extensions) or amended Federal income tax return for the taxable year in which the gain would have been recognized but for the OZ rules.

30-Month Substantial Improvement Period. For purposes of the substantial improvement requirement with respect to property held by an OZ fund or qualified opportunity zone business, the period beginning on April 1, 2020, and ending on March 31, 2021, is disregarded in determining any 30-month substantial improvement period (that is, the 30-month substantial improvement period is tolled during the period beginning on April 1, 2020, and ending on March 31, 2021).

90 Percent Investment Standard for OZ Funds. In the case of an OZ fund whose (i) last day of the first 6-month period of a taxable year or (ii) last day of a taxable year falls within the period beginning on April 1, 2020, and ending on June 30, 2021, any failure by that OZ fund to satisfy the 90-percent investment standard for that taxable year of the OZ fund is due to reasonable cause under Treasury Regulations Section 1400Z-2(f)(3). Thus, any failure by that OZ fund to satisfy the 90-percent investment standard for that taxable year is not taken into account for purposes of determining whether the OZ fund  or any otherwise qualifying investments in that OZ fund satisfy the requirements of Treasury Regulations Section 1400Z-2 and the Treasury Regulations Section 1400Z-2 regulations for any taxable year of the OZ fund. This relief is automatic; OZ funds do not have to call the IRS or send letters or other documents to the IRS to receive this relief. However, an OZ fund must accurately complete all lines on Form 8996 filed with respect to each affected taxable year except that the OZ fund should place a “0” in Part IV, Line 8 (Penalty). The accurately completed Form 8996 must be filed with the OZ fund’s timely filed Federal income tax return (including extensions) for the affected taxable year or years.

Working Capital Safe Harbor. As a result of the Emergency Declaration (that is, the declaration of a Federally declared disaster for purposes of Internal Revenue Code Section 165(i)(5)(A)), all OZ businesses holding working capital assets intended to be covered by the working capital safe harbor before June 30, 2021, receive not more than an additional 24 months, including any relief provided under Notice 2020-39, for a maximum safe harbor period of not more than 55 months total (not more than 86 months total for start-up businesses), to expend the working capital assets of the qualified opportunity zone business, as long as the qualified opportunity zone business otherwise meets the requirements of the working capital safe harbor.

12-Month Reinvestment Period for OZ Funds. If any OZ fund’s 12-month reinvestment period includes June 30, 2020, that OZ fund receives not more than an additional 12 months, including any relief provided under Notice 2020-39, for a maximum reinvestment period of not more than 24 months total, to reinvest in qualified opportunity zone property some or all of the proceeds received by the OZ fund from the return of capital or the sale or disposition of some or all of the OZ fund’s qualified opportunity zone property, provided that the OZ fund otherwise satisfies Treasury Regulations Section1.1400Z2(f)-1(b)(1) and invests the proceeds in the manner originally intended before June 30, 2020.

Levenfeld Pearlstein’s OZ team advises OZ program sponsors, developers, and investors and will continue to monitor further OZ program developments.