O-Zone Investors Look for Additional Coronavirus Relief
An IRS-provided deadline extension for Opportunity Zone investors was helpful, but some practitioners say more relief may be warranted in response to the coronavirus pandemic.
In Notice 2020-23, 2020-18 IRB 1, the IRS provided expansive deadline relief until July 15. That included the deadline to invest a gain in a qualified opportunity fund, according to Tom West of KPMG LLP.
“That is certainly helpful for many investors . . . but it may not be enough,” West said April 16 on a webinar hosted by his firm.
Investors normally have 180 days from the time they recognize an eligible gain to invest that gain in a QOF. If that 180-day deadline was set to expire between April 1 and July 15, the investor would have until at least July 15 to make the investment. But as West noted, that could mean an extension of just a few days depending on the taxpayer’s specific situation.
“There’s already questions about whether or not all QOF investors should get a further extension, potentially giving every investor a three-month extension,” West said.
Orla J. O’Connor, also of KPMG, noted that because the notice came out after April 1, it provided some retroactive relief to taxpayers whose 180-day period had already expired.
The final Opportunity Zone regulations (T.D. 9889) include a 31-month working capital safe harbor under which an Opportunity Zone business can hold cash as long as it has a written plan in place. West noted that under reg. section 1.1400Z2(d)-1(d)(3)(v)(D), a business could get an additional 24 months if it’s located within a federally declared disaster area as defined in section 165(i)(5).
“Nobody could have contemplated the current kind of disaster that we’re operating under,” West said, adding that the regulations on this point aren’t entirely clear. He said there’s an argument that all Opportunity Zone businesses are now operating in disaster areas and that all of them should get the additional 24 months.
“I think that’s the most generous interpretation, but I think it is a relatively reasonable one under the language of the regulations,” West said.
However, West said the preamble to the regs might undercut that reading. “It suggests that you would get this extended time if there was a delay in your working capital plan attributable to the disaster,” he said.
That may mean that businesses would have to show that the coronavirus was responsible for the delay in their project, West said. He noted that groups like the Economic Innovation Group have already submitted letters to Treasury and the IRS asking for clarification on the issue.
O’Connor agreed with West that the relief could be read as automatic. She said the language in the regulations that’s giving practitioners pause states that a business “may receive up to” 24 months. She said it’s likely the IRS will clarify whether some period less than 24 months is applicable.
Reasonable Cause and Other Relief
The reasonable cause exception to the 90 percent test, which requires funds to maintain at least 90 percent of their assets as qualified Opportunity Zone property, could also provide relief to investors. But West said there’s little guidance on what constitutes reasonable cause and that he hopes the IRS will issue guidance that clarifies whether coronavirus-related delays fall under the reasonable cause exception.
O’Connor said it’s usually important for taxpayers relying on reasonable cause exceptions to document their reasoning, but that a safe harbor would provide more certainty and be easier to meet.
Extending the 30-month period to substantially improve property is another form of relief being sought, O’Connor said. The IRS also could clarify that employees who telework out of an Opportunity Zone are nevertheless deemed to provide service within the zone, she said.
Some other ideas would require congressional action, O’Connor said, like locking in the current capital gains rate so that taxpayers don’t have to risk paying a higher rate in the future. Congress could also expand the definition of eligible gains that can be invested or create more zones to invest in, she said.