As a result of the COVID-19 Pandemic, The Internal Revenue Service (IRS) is granting Opportunity Zone Funds relief on some of the requirements associated with this industry's recently passed tax incentive programs.
What are Opportunity Zones and How are Investors in These Zones Taxed?
Opportunity Zones are defined in their inception by the 2017 Tax Cuts and Jobs Act as low-income, or distressed communities that would benefit from developer investment. The Act provided substantial tax breaks to those investing in development projects within qualified regions, in some cases allowing to defer capital gains taxes indefinitely.
How Has the COVID Pandemic Affected Opportunity Zones and Their Investors?
As a result of the COVID pandemic, development projects throughout the country have been struggling to maintain proper funding, especially in Opportunity Zones that are usually hot areas for risk-taking investors. As a response, the IRS has taken measures to stimulate and facilitate the ongoing investments in these areas by amending temporary relief policies for these projects. The IRS recently released the Notice 2020-39 and updated their FAQ page about Qualified Opportunity Zones. The notice answers questions pertaining to testing dates for assets held by Qualified Opportunity Funds (QOFs), timeframes for taxpayers to invest eligible gains in QOFs, and informed taxpayers about additional time granted to projects undertaken by qualified opportunity zone businesses for meeting the deadlines laid out in the 2017 Tax Act.
Taxpayers who sold property for an eligible gain and would have had 180 days to invest in a QOF to defer that gain, now have additional time. The IRS Notice states that if a taxpayer’s 180th day to invest in a QOF falls on or after April 1, 2020, and before December 31, 2020, the taxpayer now has until December 31, 2020 to invest that gain into a QOF. The notice also states that the period between April 1 and December 31, 2020, are now suspended for purposes of the 30-month period which property may be substantially improved.
The IRS found that in response to the COVID pandemic, a QOF that fails to hold less than 90 percent of its assets in Qualified Opportunity Zone Property on any semi-annual testing dates between April 1 and December 31, 2020, can qualify as exempt from this requirement. They can claim the failure to meet this requirement as a result of a reasonable cause under section 1400Z-2(f)(3) of the Tax Code.
The goal of the IRS in implementing these measures is to help maintain cash flow for ongoing projects in Opportunity Zones to reassure investors. These measures serve to both increase investments into Opportunity Zone related projects and decrease the removal of existing capital by those that feel they may lose money as shareholders during the pandemic.