The COVID-19 outbreak is prompting proposed changes to Opportunity Zones, which allow investors to defer and lower capital gains taxes through 2026 by investing their profits in areas coping with unemployment, lower wages and community blight.
In recent weeks, the IRS has revised filing deadlines for 2020 capital gains associated with Opportunity Zones. Members of Congress want the IRS to go even farther, and some have introduced legislation to expand the timeline for the program by several years.
Qualified Opportunity Zones, as defined by the Internal Revenue Service, were created by the 2017 Tax Cuts and Jobs Act. The zones, in the words of the IRS, “are designed to spur economic development and job creation in distressed communities throughout the country and U.S. possessions by providing tax benefits to investors who invest eligible capital into these communities. Taxpayers may defer tax on eligible capital gains by making an appropriate investment in a Qualified Opportunity Fund and meeting other requirements.”
IRS Extends Deadlines to Invest in Opportunity Zones
On April 9, in response to the COVID-19 outbreak, the IRS issued Notice 2020-23, which, among other things, extends the deadlines for investments in Opportunity Zones and provides for certain other forms of relief.
Under the Opportunity Zone program, realized capital gains reinvested in certain real property located in “Opportunity Zones” within 180 days of the realization of the gain can be eligible for deferral and potential exclusion of the gain from income.
Under Notice 2020-23, that 180-day period is deemed a “time-sensitive” action, such that if a taxpayer’s deadline to invest in an Opportunity Zone falls between April 1, 2020, and July 15, 2020, the deadline is automatically extended to July 15, 2020, which may offer additional time to make eligible Opportunity Zone investments.
Notice 2020-23 also extends the 31-month working capital safe harbor in the regulations applicable to Qualified Opportunity Zone businesses for an additional 24 months, provided the business is located in a federally-declared disaster area. On March 13, 2020, the White House declared the COVID-19 pandemic a federal disaster – which placed all 50 states within a federally-declared disaster area for the duration of the declaration. Presumably, this makes the extension broadly applicable, though the IRS language is not specific.
Additional Changes to Opportunity Zone Law Requested
In early May, Sen. Tim Scott, R-S.C., who has championed Opportunity Zones and included language for the program in the 2017 legislation, called upon the Treasury Department to provide further relief to a broader group of Opportunity Zone taxpayers. He was joined by eight other Republican senators in the request.
As noted in a press release from Scott’s office, “The relief recently provided that gives certain taxpayers more time to invest private capital into needy communities should be extended to all taxpayers throughout the end of the year. Specifically, the 180-day investment period for a taxpayer’s sale or exchange of capital gain property to be contributed to a Qualified Opportunity Fund (QOF) should be extended by three months for all 180-day investment periods with respect to capital gains for which the 180-day period would end on or after March 13, 2020 and on or before December 31, 2020.”
The request also asked that the Treasury Department:
- Allow COVID-19 to qualify under the reasonable cause exception for Qualified Opportunity Funds (QOFs).
- Clarify that the 24-month extension of the working capital safe harbor is now available nationwide due to the federal emergency declaration.
- Make clear that all QOFs nationwide can take advantage of the 12-month extension to reinvest proceeds.
- Allow redemptions of investment capital in excess of an entity’s basis in a QOF to automatically be considered as an inclusion event if such redemptions are due to the effects of COVID-19.
- Provide a 12-month extension to the 30-month substantial improvement period allotted for certain Qualified Opportunity Zone property.
- Clarify that businesses are not penalized for employees who may be teleworking outside of their normal working locations within an Opportunity Zone because of the COVID-19 pandemic.
- Relax requirements that a substantial portion (defined as 40-percent) of the intangible property of a Qualified Opportunity Zone business be used in its active conduct within an Opportunity Zone.
- Create an additional cure period equal to 6 months for a non-compliant trade or business if the trade or business can demonstrate that its loss of qualification was caused or facilitated by the COVID-19 pandemic.
In Congress, as well, legislation has been proposed that would make substantial, short- and long-term changes to the Opportunity Zones program.
On April 21, Representatives John Curtis, R-Utah, and Henry Cuellar, D-Texas, introduced the “COVID-19-Impacted Small Business Opportunity Zone Act.” The bill would temporarily define small businesses impacted by COVID-19 as “Qualified Opportunity Zone Businesses.” The sponsors say this would “incentivize private investment in these entities by providing their investors with similar tax incentives to Opportunity Zones.”
A week earlier, Rep. Denver Riggleman, R-Va., and five co-sponsors introduced legislation that defers for four years the tax on gain from investment in Opportunity Zone property. Referred to as the Opportunity Zone Extension Act, the legislation would change the date for investment gains in Opportunity Zones to be realized from December 31, 2026 to December 31, 2030. This, according to a press release from Riggleman, will “allow investors additional time to invest in qualifying communities and access the incentives that were signed into law with the Tax Cuts and Jobs Act.”
Extending and expanding the program also has support at the White House. On May 22, Ja’Ron Smith, a White House adviser, told National Public Radio that the administration is looking “at ways that we can extend the [original] legislation.” Smith declined to offer details to NPR on what an extension might entail.
At Kaplan Voekler Cunningham & Frank, we will continue to closely monitor IRS actions and the proposed legislative changes. If you have questions about how you can take advantage of Opportunity Zones or how the new IRS deadlines or proposed changes could affect your business, contact us for a consultation.