The Qualified Opportunity Zone (QOZ) program maps out specific guidelines that investors must follow to take full advantage of the tax incentives under the program by investing into Qualified Opportunity Funds (QOFs).
The disruption caused by the COVID-19 crisis has hindered investors and funds from being able to meet many of the program’s requirements. The IRS had previously responded by extending certain deadlines and granting other relief through Notice 2020-39 back in June 2020.
In its latest guidance, Notice 2021-10, issued on January 19, 2021, the IRS further extends the relief measures previously provided under Notice 2020-39 for navigating the QOZ process through the ongoing pandemic, as follows:
- 180-Day Investment Period – If you have eligible gains and your 180th day to invest and defer those gains through a QOF falls on or after April 1, 2020 and before March 31, 2021, you now have until March 31, 2021 to invest the gain into a QOF.
- 30-Month Substantial Improvement Period – April 1, 2020 through March 31, 2021 will be disregarded for purposes of the 30-month substantial improvement period requirement for property held by a QOF and QOZ business.
- 90% Asset Test – If a QOF fails to hold at least 90% of its assets in QOZ property on any semi-annual or annual testing date between April 1, 2020 and June 30, 2021 due to a reasonable pandemic-related cause, the QOF will not be liable for penalties during this period. The notice clarifies that this failure must not prevent qualification of an entity as a QOF or an investment in a QOF from being a qualifying investment.
- Working Capital Safe Harbor Period – QOZ business projects holding working capital assets intended to be covered by the working capital safe harbor before June 30, 2021 will have an additional 24 months, 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 their working capital.
- 12-Month Reinvestment Period – QOFs that received return of capital or proceeds from sale or disposition of QOZ stock, partnership interest or QOZ business property and whose 12-month reinvestment period included June 30, 2020 get an additional 12-month extension, for a maximum reinvestment period of not more than 24 months total, to reinvest those proceeds in another QOZ property to meet the 90% asset test as intended prior to the pandemic.
QOZs remain a tremendously valuable tax-savings vehicle, especially as investors plan to recover from COVID-19 losses. For more information on how you can explore or continue the process of QOF investments during the pandemic, please contact Shashi Singal, Principal in our Tax Advisory practice, at firstname.lastname@example.org.