CGS3’s Phil Jelsma gives insight on the recent IRS guidelines that extend the timeline to invest capital gains in an opportunity zone fund.
A few weeks ago the IRS once again extended the deadline to invest capital gains in a qualified opportunity zone. The extension is significant. Investors typically have 180 days to invest capital gains in a qualified fund, but if an investor’s 180-period ended after April 1, 2020, the deadline has been extended to March 31, 2021.
The new guidelines came with a handful of other extensions as well. Opportunity zone legal expert Phil Jelsma, a partner at CGS3, outlines the following extensions:
90% Asset Test: Failure to meet the required 90% asset test on of after April 2020 to June 2021 is deemed due to a reasonable cause.
Reinvestment: If a qualified opportunity zone fund sells a property or business, it typically has 12 months to reinvest those proceeds. Now, if the reinvestment period includes June 30, 2020, the fund has not more than an additional 12 months after that date to reinvest proceeds.
The Substantial Improvement Test: Generally, a qualified fund business has up to 30 months to double its tax basis to satisfy the substantial improvement test. Now, the substantial improvement period is tolled from April 1, 2020 to March 31, 2021. In addition, the working capital safe harbor, which protects funds held by the business to spend on substantial improvement is extended to June 30, 2021 and the business will receive not more than an additional 24 months for a total of not more than 55 months (31 + 24) to expend its working capital.
“Most industries have been impacted in some way by the COVID-19 pandemic, with many opportunity zone investments also adversely impacted and delayed by changes in the financing market,” Jelsma tells Globest.com. “Extending the deadlines will help drive additional investor interest in opportunity zones, as the pandemic continues.”
These deadlines mean that investors have more time to reinvest capital gains taxes from 2020. “Generally, if an investor received capital gains through a 2019 Schedule K-1 from a pass-through entity like a partnership, LLC, s corporation or trust those capital gains would have had to been invested in a QOF by December 31, 2020,” says Jelsma. “That period is now extended to March 31, 2021. In addition, if a taxpayer disposed of stock or property after November 1, 2019, generally those gains can also be deferred by investing in a QOF by March 31, 2021.”
With the pandemic and the economic dislocation ongoing, Jelsma says that it is likely the IRS will issue additional changes or extensions. “I think the IRS recognized that many projects, particularly involving the hospitality, entertainment and restaurant industry, have been delayed by COVID-19. With this in mind, yes I would expect further changes to the IRS’ deadlines in coming weeks,” he says.
In addition to the pandemic, the new administration could also bring or encourage additional changes to the opportunity zone guidelines, although Jelsma says that it is still uncertain what those changes might look like. ‘It still remains to be seen what the Biden Administration plans on doing with Opportunity Zones,” he says. “His campaign released a proposal in August of 2020 with three goals. First, incentivizing QOFs to partner with nonprofit or community-oriented organizations; second, directing the IRS to review the program to ensure tax benefits whether are clear economic, social and environmental benefits to the community; and third, introducing transparency requiring recipients of OZ tax benefits to provide detailed reporting and disclosure. Even though federal scrutiny of the program may be increased under the new administration—especially to further benefit economically disadvantaged Americans—for the most part, the program is very popular and will in all likelihood remain intact.”
Source: “IRS Extends Opportunity Zone Deadlines Again“