We previously published a "Real Asset Services – Opportunity Zones" whitepaper discussing the tax incentives available through investments in Opportunity Zones from the 2017 Tax Cut and Jobs Act. Since then, the IRS has issued several updates, and in 2020, COVID-19 caused many issues and was extremely problematic within the Qualified Opportunity Zone space. Below are a few of the items addressed in IRS Notices issued throughout 2020 as a result:
1. On April 9, 2020, the Treasury Department & IRS released Notice 2020-23 to provide relief to taxpayers affected by the COVID-19 crisis by extending due dates with respect to certain taxpayer issues.
2. On June 4, 2020, the Treasury and the IRS issued Notice 2020-39 to provide relief for QOFs and investors. The notice addressed the application of relief provisions under the 1400Z-2 regulations. It provided the following:
- 180-Day Investment Requirement
If the last day of the 180-day investment period within which an investor must make an investment in a QOF in order to satisfy the 180-day investment requirement falls on or after 4/1/20 and before 12/31/20, then the last day of that investment period is postponed to 12/31/20.
- 30-Month Substantial Improvement Period
The requirement with respect to property held by a QOF or QOZ business states that the period of 4/1/20 and ending 12/31/20 is disregarded in determining any 30-month substantial improvement period.
- 90% Investment Test
It is required that a QOF has substantially all (90%) of its assets in QOZ property. Testing occurs on the last day of the first 6-month period and also on the last day of the year. The Notice 2020-39 states that, due to the pandemic, if a QOF holds less than 90% of its assets in QOZB property as determined by a semi-annual testing date from April 1, 2020, through December 31, 2020, it will not fail the 90% test. An investment that falls short of the threshold will not be disqualified under the 90% test as long as it meets “reasonable cause” under section 1400Z-2(f)(3).
- Working Capital All
QOZ businesses holding working capital assets intended to be covered by the working capital safe harbor before 12/31/20 shall receive not more than an additional 24 months to expend the working capital assets of the QOZ business.
- 12-Month Reinvestment Period
If a QOF’s reinvestment period includes 1/20/2020, the QOF receives up to an additional 12 months to reinvest in another QOZ property.
3. On January 19, 2021, the IRS released Notice 2021-10. The IRS extended extensions from the prior Notice 2020-39 with regards to the QOZ process. The following provisions were affected:
- 180-Day Investment Requirement for QOF investors
If your 180th day falls on or after 4/1/20 and before 3/31/21, you have until 3/31/2021 to invest the gain into QOF. This Notice extends the Notice 2020-39 extensions from 12/31/2020 to 3/31/2021.
- 30-Month Substantial Improvement Period for QOFs
The period of 4/1/2020 to 3/31/2021 will be disregarded for purposes of the 30-month substantial improvement period requirement. This Notice extends the Notice 2020-39 extensions from 12/31/2020 to 3/31/2021.
- 90% Investment Standard
If the Qualified Opportunity Fund fails the 90% assets requirement (Semi-annual Test) between April 1, 2020, and June 20, 2021, due to a COVID-19 related reason, the QOF will not be penalized during this time. The prior notice had the end date as 12/31/2020.
- Working Capital Safe Harbor
The period of the safe harbor has been extended from 12/31/2020 (Notice 2020-39) to June 30, 2021.
- 12-Month Reinvestment Period
Any QOF who received capital gain proceeds from the sale of a QOF investment and the 12-month period including June 30, 2020, will receive an additional 12-month extension for a maximum total of 24 months to reinvest those proceeds into another QOZ asset to meet the parameters of the 90% asset test.
The SS&C Real Assets team is committed to working with our clients to ensure transactions are captured within our technology platform with the level of granularity required to keep track of the Opportunity Zone provisions and to support client self-certification reporting. SS&C’s Data Services provides clients with an end-to-end combined service and technology solution for managing the opportunity zone investments datasets and creating custom analysis and reporting. Using our proprietary CORE data management platform, our Data Services team is able to bring together disparate data sets into a single, online location, and then build custom dashboards and report templates using our proprietary Sightline analytic reporting application.
If you’d like to learn more about QOFs and the recent updates in 2021 download our on-demand webinar "Opportunity Zones 2021: An evolving investment vehicle."
Written by Michael Gilligan
Tax Director, SS&C Real Asset Services