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Opportunity Zone Compliance: IRS Offers Relief

On June 4, 2020, the IRS announced new Opportunity Zone Compliance guidelines, which provides broad relief for several opportunity zone compliance requirements. This relief is necessary because of the COVID-19 crisis and its economic effects. The design of the assistance offers more flexibility to QOFs (Qualified Opportunity Zone Funds) and investors in them. The new rules will:

  • provide penalty relief automatically for all 90% asset test dates that fall during the period from April 1, 2020 to December 31, 2020;
  • extend any deadline for the 180-day period for investing in a QOF occurring on or after April 1, 2020, until the end of the year;
  • disregard the period from April 1, 2020, to the year’s end as a part of a 30-month period to substantially improve qualified properties;
  • extend by 24 months the working capital 31-month safe harbor; and
  • double the QOF’s 12-month period for reinvesting proceeds made from selling a qualified property.

This administrative relief will help QOFs navigate through today’s challenging economic and investment climate.

The Benefit for Opportunity Zones

The Tax Cuts and Jobs Act of 2017 created Opportunity Zones to promote investment in certain geographic areas. The taxpayers who invest in a QOF may defer or exclude capital gains should they meet the requirements. Businesses must make contributions to the QOF within 180 days after the exchange or sale to make qualifying investments.

Semiannual testing by QOFs is necessary to ensure they have qualified for 90% of the fund’s assets. If they fail to meet this standard, they face penalties. It is possible to waive those penalties for a reasonable cause. The relief provided by the IRS removes penalties for failing to test between April 1, 2020 and December 31, 2020.

This relief has also addressed the requirements for substantial improvement. For nonoriginal use business properties to qualify, they must substantially improve over 30 months. This notice now disregards the period from April 1, 2020 to December 31, 2020, for this purpose. This means the window to carry out substantial improvement is potentially extended by eight months.

The new guidance has clarified vital relief for a safe harbor for working capital already in the regulations. Generally, QOZBs (Qualified Opportunity Zone Businesses) have a safe harbor of 31 months. This allows them to spend working capital. This is capital that would have violated the bans on holding more than 5% of the property in nonqualified financial property. QOZBs now have an extra 24 months within which to consume working capital assets.

Finally, the IRS has extended the 12-month period to reinvest proceeds from selling a qualified property for asset test purposes. The new notice provides that any period of 12 months, including January 20, 2020, will have a 24-month extension.
What Happens Next?

Today’s economic climate has posed several challenges for QOFs, with most of the focus being on investments in real estate. This new administrative relief is quite generous. This is particularly true for the automatic waiver of penalties relieving QOFs of their immediate responsibility for compliance. This new Opportunity Zone Compliance guidance should give more flexibility to investors and QOFs.

For more information about this article, please contact our tax professionals at or toll free at 844.4WINDES (844.494.6337).
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