September 28, 2020

Volume X, Number 272

September 25, 2020

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Qualified Opportunity Zones: COVID-19 Deadline Extensions

Over the last few weeks, the IRS has provided taxpayers with extensions of time to file various tax returns and pay certain taxes. On April 9, 2020 the IRS issued Notice 2020-23, which further expands on past extensions and adds additional time to perform time-sensitive actions. Time-sensitive actions that have been extended include the 180-day period for investing qualified capital gains into a Qualified Opportunity Zone (QOZ) Fund. In addition, certain sections of the Internal Revenue Code already provide taxpayers built-in relief for deadlines if the taxpayer is affected by a presidentially-declared federal disaster. Consequently, by virtue of the president's recent pronouncement that the COVID-19 pandemic is a federal disaster, QOZ businesses utilizing the working capital safe harbor may also have an extended deadline for deployment of capital. The declaration may also impact penalty relief for reasonable cause.

180-Day QOZ Fund Investment Period

Generally, taxpayers have 180 days to reinvest qualifying capital gains into a QOZ Fund pursuant to section 1400Z-2(a)(1)(A) of the Code. The mechanics of how this 180-day period is computed is discussed in prior blog post, and can get somewhat complicated for flow through entities. Now, pursuant to Notice 2020-23, if that 180-day period expires on or after April 1, 2020 and before July 15, 2020, that period does not expire until July 15, 2020. This extension of time is automatic and no election or other filing is required. Individuals, trusts, estates, corporations, partnerships and other non-corporate tax filers qualify for the extra time.

Working Capital Safe Harbor

The QOZ rules provide a QOZ business with a 31-month window in which it can maintain and deploy working capital funds to acquire, construct or rehabilitate tangible business property in the QOZ. The 31-month working capital safe harbor exists because qualifying as an QOZ investment is predicated on engaging in a trade or business inside of a QOZ, and some trades or businesses or startup businesses require a lead time for converting invested capital into assets to be used in the trade or business. If that QOZ business is located in a federally-declared disaster area, the period over which the invested capital is converted into assets could be delayed for reasons outside the control of the QOZ Fund. Treasury Regulation section 1.1400Z2(d)-1(3)(v)(D) provides the QOZ business an additional 24 months to complete the acquisition, construction and/or rehabilitation of the tangible business property if the QOZ business is located in a federally-declared disaster area. Notably, as of April 3, 2020 every state and most territories are subject to a disaster declaration, so most QOZ businesses should have an additional 24 months added to the working capital safe harbor period.

Reasonable Cause

A QOZ Fund is penalized if at least 90 percent of its assets do not consist of QOZ property. However, these penalties are waived if the QOZ Fund can show that such failure is due to reasonable cause. The related Treasury regulations do not define what constitutes reasonable cause. Other sections of the Code provide similar reasonable cause relief from penalties. In those cases, such relief is generally permitted where the taxpayer can show that the penalized failure was due to circumstances outside the control of the taxpayer. A failure to maintain the 90 percent investment standard for reasons related to COVID-19 may potentially qualify for this reasonable cause penalty relief.

© 2020 Varnum LLPNational Law Review, Volume X, Number 111

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About this Author

Katie K. Roskam, Michigan, tax attorne
Associate

Katie is an associate in the firm’s tax practice team. She focuses on federal income tax matters for both foreign and domestic clients and issues pertaining to employee benefits and executive compensation. Katie's previous work experience includes researching and writing appellate briefs while clerking at Even & Franks PLLC in Muskegon for several summers. She also worked as a tax research assistant at Loyola University School of Law. She served as an extern for Judge Ronald A. Guzman in U.S. District Court for the Northern District of Illinois and has worked as an...

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THomas Hillegonds Estate Planning Attorney Varnum Law
Associate

Tom is a member of Varnum’s Estate Planning Team. He provides full-service estate plan preparation, estate and trust administration, guardianship and conservatorship services. With a strong background in business law, accounting and taxation, Tom’s clients include privately-owned businesses as well as individuals who have sophisticated estate planning needs.

Tom is a registered CPA with over five years of experience in public accounting, including time with a large national accounting firm where he provided strategic tax reviews for Fortune 500 companies in various industries.  

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