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IRS Hears Opportunity Zone Advocates – Key Deadlines Extended IRS Hears Opportunity Zone Advocates – Key Deadlines Extended

IRS Hears Opportunity Zone Advocates – Key Deadlines Extended

As those involved in Opportunity Zone projects and investments know well, there are critical deadlines that have to be complied with under the Opportunity Zone regime. There has been a steady stream of calls from both industry professionals and lawmakers for the Internal Revenue Service (“IRS”) to extend some of these deadlines due to the effects of COVID-19. Responding to these calls, the IRS just issued guidance extending key deadlines, which provide welcome flexibility on several fronts, as detailed below.

Extension of Time to Invest Capital Gains into Opportunity Zone Funds. When the IRS extended many other tax deadlines in April, it had provided taxpayers whose 180-day deadline (to invest eligible capital gain into a Qualified Opportunity Zone Fund (“QOF”)) fell between April 1 and July, 14 2020, an extension to invest that gain into a QOF until July 15, 2020. This deadline has been extended again, with the IRS providing that any 180-day deadline ending between April 1, 2020 and December 30, 2020 is now extended to December 31, 2020.

Qualified Opportunity Zone Fund 90% Test. QOFs are tested on a semi-annual basis and can be penalized if 90% of the assets of the QOF (as averaged between the two testing dates) are not invested in eligible Qualified Opportunity Zone property. The IRS has provided that the penalty will not be imposed on a QOF for failing to satisfy the 90% standard if the QOF’s (i) last day of the first 6-month testing period, or (ii) the last day of the taxable year falls between April 1, 2020 and December 31, 2020. The IRS went on to indicate that such a failure also would not adversely impact the QOF (or its investors) under any other aspects of Opportunity Zone regime.

This is particularly important relief for QOFs that have an upcoming testing date of June 30, but have been unable or not inclined to make investments in Opportunity Zone projects due to COVID-19. 

Substantially Improving Property. There is a 30-month timeline for QOFs and Qualified Opportunity Zone Businesses (“QOZBs”) to substantially improve assets to qualify as good Opportunity Zone property that do not otherwise qualify as “original use” assets. The IRS has stated that the 30-month timeline is tolled between April 1, 2020 and December 31, 2020, which essentially provides that these nine months will be disregarded when determining compliance with this standard. 

Extension of Working Capital Safe Harbor Timeline and QOF Reinvesting Proceeds. The final Treasury Regulations on Opportunity Zones provided the two extensions of timelines to the extent that there had been a federal disaster declaration by the President of the United States:
  1. A QOZBs working capital safe harbor timeline of 31 months (or up to 62 months if additional capital was invested) could be extended by another 24 months; and
  2. The 12-month timeline for a QOF to reinvest proceeds it received from a return of an investment or disposition of Opportunity Zone property could be extended by another 12 months.
While the President did declare a federal disaster for the entire country due to COVID-19, there were questions whether these extensions were covered by the disaster declaration and additionally whether the IRS had to approve the extensions. The IRS confirmed the 24-month working capital safe harbor extension can be utilized if a QOZB working capital safe harbor covers working capital assets held prior to December 31, 2020, and additionally, a QOF receives the additional 12 months to reinvest proceeds if it held such proceeds on January 20, 2020. 

To the extent you have questions regarding these extensions or about the Opportunity Zone Initiative, feel free to contact Matt Ehinger, Jay Augustyn, Josh Schlake, or any member of the Ice Miller Opportunity Zone Working Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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