The COVID-19 pandemic adds to that complexity and without further relief from Congress or Treasury may result in investors losing such tax benefits if real estate projects or businesses cannot meet the various tests within the prescribed timeframe. While the final regulations issued in December 2019 provide certain limited relief and the IRS took a step in the right direction by providing another important timing deferral, more steps are required, and guidance needed. In this alert we summarize the existing law and relief and identify open questions and calls for additional guidance and relief.
Limited extension for the 180-day period to making OZ investments
The IRS in the past few weeks, under its authority to postpone times for performing certain acts in response to a federally declared disaster has issued several notices relating to postponing the filing date and payment of certain tax returns and taxes. On April 9, 2020, the IRS issued an additional notice amplifying its previous notices. Under the latest notice, in cases where the 180-day period to make an OZ investment falls between April 1, 2020 and July 15, 2020, a taxpayer has until July 15, 2020 to make the investment. This limited extension allows potential investors more time to locate and find the right QOZ project.
Tolling of the prescribed period due to the national disaster declaration
Tolling of the prescribed period due to government approval delay
Possible QOF penalty relief for reasonable cause due to COVID 19
A QOF must hold 90% of its assets in qualified opportunity zone property as measured on two testing dates each year. Failure to meet this test results in a monthly penalty. The QOZ rules provide that a QOF that failed to meet this test due to a “reasonable cause” may be relieved from the penalty imposed as a result of such failure. While neither the statute nor the regulations define what may constitute a “reasonable cause”, it seems to us that COVID-19 related delays and issues should be considered as such. While it is hoped that the IRS will take this position, it has not yet done so.
Open questions and what to do in in the interim
Other important dates and tests in the QOZ rules remain in effect without any relief or postponement. For example, unlike in the case of working capital, the 30-month “substantial improvement” test does not have any explicit exceptions. Accordingly, unless Congress or Treasury would come out with a specific relief, it is possible that while the clock stops for purposes of meeting the working capital test, a QOZB may still fail to qualify as a QOZB due to not meeting the “substantial improvement” tests when the construction project was shut down due to COVID-19 order or materials did not arrive on time for the same reason. Other examples would be if a certain QOZB fails to meet the 50% income test as a result of the shutdowns and stay home orders and employees being required to work from home; or if a QOF’s intended target investment was put on hold or shut down completely due to COVID-19, which would result in the QOF not meeting its asset test.
Until further relief or guidance comes (as we hope that it will), we recommend documenting in detail any delays that are caused by the COVID-19 pandemic, any correspondence relating to delays or cancellations of projects you intended to invest in and any inability to meet any of the QOZB or QOF tests due to the COVID-19 pandemic and shutdowns or interruptions resulting from it; so once guidance/relief comes you are ready.
The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.
Author Larry Arem is a partner in the tax practice group at Klehr Harrison.