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Pandemic-Driven Plan Changes Shouldn’t Trip Up O-Zone Businesses

Posted on July 17, 2020

The IRS is considering allowing some qualified Opportunity Zone businesses to adjust their development plans because they have been affected by the coronavirus pandemic, an agency official said.

The pandemic has prompted many entities to rework or dramatically alter their Opportunity Zone development plans, John Sciarretti of Novogradac & Co. LLP said July 15 during a virtual Opportunity Zones conference hosted by his firm.

That has caused angst for some qualified businesses that could run afoul of the safe harbor requirement that working capital assets be deployed in a manner substantially consistent with the original written plans and schedules, Sciarretti said.

Julie Hanlon-Bolton, deputy associate chief counsel (income tax and accounting), said the IRS has heard from many taxpayers who “have credibly described situations in which the original plan is now noneconomic and infeasible, and have suggested that it would be appropriate in light of the disaster for the qualified Opportunity Zone business to be allowed to adjust its plan and schedule in response to these very unique circumstances.”

“This is not an unreasonable request and we are seriously considering it,” Hanlon-Bolton said, adding that it would help if entities provided examples of how they have had to substantially change their initial plans.

Sciarretti explained that for some entities, it’s now not feasible to finish a project because, for example, debt financing is no longer a viable option.

The effects of the pandemic vary with the asset class — hospitality projects probably have faced greater challenges than those investing in residential real estate, Sciarretti said. An entity’s plan, for example, might have included a full-service hotel, but now it’s going to be a “less-than-full-service hotel,” or in more extreme situations, shift to an office building or residential property, he said. That means some entities could be changing the businesses they're in, he added.

24 Months, Only If Needed

The Opportunity Zone program, created by the Tax Cuts and Jobs Act, allows for the deferral, reduction, and in some cases elimination of capital gains tax by investing those gains in qualified opportunity funds or businesses.

Investors normally have 180 days from the time they recognize an eligible gain to invest that gain in a QOF. In response to the economic slowdown caused by the coronavirus pandemic, the IRS provided relief June 4 (Notice 2020-39, 2020-26 IRB 1). It allowed investors whose 180-day deadline was set to expire between April 1 and December 31 to have until end of the year to make those investments, in some cases.

The final Opportunity Zone regulations (T.D. 9889) include a 31-month working capital safe harbor under which a qualified business can hold cash as long as it has a written plan in place and a reasonable written schedule, and the plan is executed consistently with what’s in writing.

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). However, it wasn’t clear whether all Opportunity Zone businesses were operating in disaster areas because of the pandemic.

The IRS said in Notice 2020-39 that as a result of President Trump’s emergency declaration, “all qualified opportunity zone businesses holding working capital assets intended to be covered by the working capital safe harbor before December 31, 2020, receive not more than an additional 24 months to expend the working capital assets of the qualified opportunity zone business,” as long as the regulatory requirements are met.

That guidance, however, was unclear in terms of the meaning of “not more than an additional 24 months” — that is, whether it means that all businesses qualify for the extension, Sciarretti said. Also, does the extension hinge on the length of the federally declared disaster period, and therefore could result in a shorter time frame? he asked.

Sciarretti also pointed out that the notice didn’t address whether businesses must justify the extension they need and whether they should revise their written plans to reflect the additional time it will take to make the expenditures.

Hanlon-Bolton explained that the federally declared disaster period for this pandemic started January 20, as determined by the Federal Emergency Management Agency, and there’s currently no end date.

If the end date, for example, is December 31, 2021, and qualified Opportunity Zone businesses require relief between those dates, they wouldn't have more than 24 additional months, Hanlon-Bolton said. “I wouldn’t say that everyone gets an extra 24 months; everyone gets an extra 24 months if they need it.”

There’s no requirement that the businesses justify the extensions they need, or submit anything to the IRS, Hanlon-Bolton said, but she noted that it would be prudent to maintain documentation to substantiate that the disaster is to blame for the delayed deployment of working capital assets.

Hanlon-Bolton also suggested that for businesses taking additional time, “it would be appropriate to update the timeline, but there is no current requirement.”

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