Seyfarth Synopsis: On January 19, 2021, the Internal Revenue Service (the "IRS") issued Notice 2021-10 (the "Notice"), which extends the relief that it previously provided to qualified opportunity funds, their sponsors, and their investors when it issued Notice 2020-39 on Thursday, June 4, 2020. You can see the prior Legal Update on the Notice 2020-39 here. In general, the Notice extends each relief provision until either March 31, 2021 or June 30, 2021. The extended relief will allow qualified opportunity funds, their sponsors, and their investors to continue to address the challenges presented by COVID-19.
Here is a summary of the extended relief:
- The Notice further extends the 180-day deadline for taxpayers to invest eligible gains in a qualified opportunity fund. Now, if a taxpayer's 180-day deadline to invest eligible gains in a qualified opportunity fund was or is on or between April 1, 2020 and March 31, 2021, then the deadline has been automatically extended to March 31, 2021. However, a taxpayer who sells an asset that generates eligible gains in 2020 will still need to make a valid deferral election in accordance with the instructions to Form 8949, complete Form 8997, and file the completed Form 8949 and Form 8997 with a timely filed Federal income tax return (including extensions) or amended Federal income tax return for 2020 even if the taxpayer invests the eligible gains in a qualified opportunity fund in 2021.
- The Notice extends the provision that automatically applies the statutory "reasonable cause" exception to any qualified opportunity fund that does not satisfy the 90% "good asset" test on any testing dates that fall on and between April 1, 2020 and March 31, 2021. The qualified opportunity fund must still accurately complete all lines of Form 8996 except that it should put 0 in Part IV, Line 8 (the Penalty section) and must include the Form 8996 with its timely filed Federal income tax returns (including extensions) for 2020 and 2021.
- The Notice extends the provision that ignores the period from April 1, 2020 through March 31, 2021 in determining satisfaction of the 30-month substantial improvement requirement. In effect, this creates an extension of up to 12 months for substantial improvement projects that were in process on April 1, 2020 and correspondingly shorter extensions for projects initiated between April 1, 2020 and March 31, 2021.
- The Notice continues to treat the COVID-19 pandemic as a federally declared disaster through June 30, 2021 for purposes of the rule set forth in the final qualified opportunity zone regulations that extends the Working Capital Safe Harbor for up to 24 months in the event of a federally declared disaster. In effect, this creates a maximum safe harbor period of not more than 55 months total (not more than 86 months total for start-up businesses) to expend the working capital assets of the qualified opportunity zone business, as long as the qualified opportunity zone business otherwise meets the requirements of the Working Capital Safe Harbor.
- And finally, the Notice extends the provision that extends the 12-month reinvestment period for cash returned to a qualified opportunity fund following a disposition of qualified opportunity zone property for up to an additional 12 months if the 12-month reinvestment period included June 30, 2020 and the qualified opportunity fund meets the other requirements.
This continues to be very positive news for qualified opportunity funds, their sponsors, and their investors. However, neither the Notice nor Notice 2020-39 have dealt with a significant issue for the qualified opportunity zone industry: whether a qualified opportunity zone business must still be deploy its working capital assets in a manner that is "substantially consistent" with the "written plan" that it put in place before the COVID-19 pandemic to comply with the Working Capital Safe Harbor or can deviate from the original written plan to navigate the market upheaval that has arisen from the COVID-19 pandemic. This is especially relevant for qualified opportunity zone projects that have meaningful hospitality elements (hotels, restaurants, entertainment facilities) for which transaction execution is in material peril due to the impact of the COVID-19 pandemic on those business sectors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
