The Tax Cuts and Jobs Act (TCJA) enacted in December 2017 introduced an investment vehicle, known as opportunity zones (OZ), which allow taxpayers to invest in their communities while saving taxes. The Internal Revenue Service (IRS) just issued updated guidance on OZs . Here’s what’s new.

What is an opportunity zone?

As we cover in this blog, Opportunity Zones: Invest in your Community while Saving Tax, The Tax Cuts and Jobs Act (TCJA) introduces a new investment vehicle called Opportunity Funds which help direct resources to low income communities, known as Qualified Opportunity Zones, to help investors avoid capital gains tax.

If you timely invest capital gains into a qualified opportunity zone fund (QOF), you may be able to defer or eliminate the tax that would come with the sale of your current investments. An OZ investment generally needs to be made within 180 days of the realization of the capital gain in order to be eligible for deferral and potential exclusion of the gain from your income.

Opportunity zones are designed to spur economic development and job creation in struggling communities. Governors in every state designate opportunity zones that are deemed economically distressed, so investments in these zones are potentially eligible for preferential tax treatment.

Updated guidance

The IRS issued guidance in Notice 2020-39 extending certain timelines for the OZ program which provides:

1. Extension of 180-day investment period: The new relief provides for the 180-day investment period to be automatically extended until December 31st, 2020 if it would have originally expired after April 1st, 2020 and before December 31st, 2020.

2. Extension of 90% test for QOF: Under the OZ regulations, a QOF is required to invest 90% of its assets into qualifying opportunity zone property within 6 months and at the end of the taxable year (i.e., December 31st for a calendar year QOF). The QOF is subject to penalties on a portion of the funds in the QOF if the 90% test is not met. However, the new relief provides that if either the first 6 month testing date or the final year end testing date occurred between April 1st, 2020 and December 31st, 2020, then the failure to satisfy the 90% test is deemed to be due to reasonable cause and no penalties will be levied against the taxpayer.

3. Extension of 30 month substantial improvement test: Under the final OZ regulations, a tangible property qualifies as qualified opportunity zone business property if it meets the "substantially improved" test within 30 months of acquisition. The new relief provides for a tolling of the 30-month period beginning April 1st, 2020 and ending December 31st, 2020. So, properties that are acquired during or that have previously been acquired within an opportunity zone after January 1, 2018 and which are under construction will be provided with an additional 9 months to satisfy the substantial improvement test.

Additionally, if the Qualified Opportunity Zone Business (QOZB) is located in any federally-declared disaster area, the 12 month reinvestment requirement upon the sale of an asset and the 31 months of time under a “working capital plan” could be extended. This should be applicable to almost any QOZB given that all 50 states and most U.S. territories are subject to a disaster declaration due to the COVID-19 Pandemic.

Make sure you consult with your tax advisors regarding the effects of the COVID-19 pandemic on your OZ investment. We will alert you of any changes or updates.

Questions? Contact us.