This has been modified to reflect further extensions provided by Notice 2021-10, which was issued on January 19, 2021.
All information in this COVID-19 Response Resource issue is effective as of January 25, 2021.
With Notice 2020-39 in June of 2020 the Internal Revenue Service (IRS) paused most critical deadlines and time periods associated with the opportunity zone incentive from April 1, to Dec. 31, 2020. Notice 2021-10, issued on January 19, 2021, further pauses these deadlines until March 31, 2021.
The opportunity zone incentive was created in the 2017 Tax Act and provides for the deferral and avoidance of capital gains in conjunction with an equity investment that spurs development in certain targeted census tracts.
Notice 2021-10 in conjunction with Notice 2020-39 (collectively, the “Notices”) postpones the investment deadline to March 31, 2021, for any investment deadline arising after March 31, 2020. This means the following for calendar year taxpayers:
- Individuals or entities that realized capital gains after Oct. 4, 2019, have until March 31, 2021, to place the gains in a qualified opportunity fund (QOF).
- Individuals who were allocated capital gains from a pass-through entity accruing at any time in 2019, have until March 31, 2021, to place the gains in a QOF.
The Notices, also pause the 90-percent investment standard for QOFs and the 30-month substantial improvement period until March 31, 2021. Under the investment standard, QOFs are required to hold 90 percent of the QOF’s assets in opportunity zone businesses or property as tested semi-annually. The relaxed standard will allow for funds to largely ignore the mid-year test and retain cash while they evaluate the pandemic’s impact on the American economy.
Finally, the Notices extend the safe-harbor associated with working capital by allowing QOFs an additional 24 months to expend working capital assets.
The collective deadline changes contained in the Notices provide QOFs extraordinary flexibility to recalibrate their investment strategy in the wake of the pandemic and will significantly increase the attractiveness of opportunity zone tax incentive. The extension of the investment deadline should allow fund promoters to design fund platforms that harvest 2019 capital gains with subscriptions closing in the first quarter of 2021.
To discuss this or related matters, contact Ross Keogh by calling (406) 206.9710 or send an email to firstname.lastname@example.org.