As a result of the Covid-19 pandemic the IRS extended the deadline to file tax returns and make tax payments from April 15, 2020 to July 15, 2020. IRS added to those earlier Notices by issuing Notice 2020-23, which allows for certain taxpayers to have more time to invest “eligible gain” into a Qualified Opportunity Fund (QOF).
As, I have described in earlier blogs and other publications, The Tax Cuts and Jobs Act of 2017 established Opportunity Zones by way of a provision of the Internal Revenue Code, i.e. Section 140OZ-2 (OZ Rules). The OZ Rules allow a taxpayer with an eligible gain to defer payment of taxes on that gain until December 31, 2026 if the taxpayer invests the gain into a QOF (or directly into an Opportunity Zone Property or Business) within 180 days of the event that created such gain. The taxpayer can further eliminate 10% of the taxes on that gain if the investment is held for 7 years. Most importantly, if the taxpayer holds the investment for at least 10 years, then any appreciation on the investment will be tax-free.
IRS Notice 2020-23 allows for a taxpayer that performs time-sensitive actions that are due to be performed on or after April 1, 2020, and before July 15, 2020, to be entitled to an extension of the applicable tax filing and payment deadline until July 15, 2020. Adhering to the 180-day period after the occurrence of a capital event to investing eligible gain from that capital event into a QOF is deemed to be a Specified Time-Sensitive Action per IRS Notice 2020-23. Accordingly, if the end of a taxpayer’s 180-day period for investing eligible gain into a QOF falls on or after April 1, 2020, and before July 15, 2020, such taxpayer now has until July 15, 2020, to invest that eligible gain into a QOF.
In addition to helping taxpayers that are seeking to invest their eligible gains into a QOF, this extension also could provide QOFs with additional time to meet their deadlines, such as investing into an Opportunity Zone Property or Business, and complying with the 90% test. The 90% test is performed via a certification on IRS Form 8996 whereby the QOF measures the average of its holdings in OZ Property on the last day of the first 6-month period of the QOF’s tax year and the last day of the QOF’s tax year.
It is important to realize that if a partnership or an S Corporation realizes gain but elects not to defer that gain, and instead allocates the gain to its owners, then the owners (partners, shareholders, or limited partners) can choose when to begin the 180-day reinvestment period. The Proposed Final Regulations allow the owners of a pass-through entity to begin the 180-day period on the last day of the entity’s tax year, rather than on the date of the capital event.
These extensions are generally positive, the taxpayers can face difficulties as a result of this pandemic in meeting tax related deadlines, these extensions can lead to cascading or flowing timeline extensions as the OZ Program deadlines build upon one another. Consider that the latest date for which a taxpayer may generate a capital gain is 12/31/2026, and a taxpayer would then have 180 days to invest that gain in a QOF, i.e. by June 30, 2027. The QOF would then have 180 days to invest the funds into OZ property, i.e. December 31, 2027 — the 10 year hold would then run until 12/31/2037, and the Regulations allow another 10 years to dispose of the investment. Therefore, the taxpayer would have until 12/31/2047 to make the step-up basis election.
These timelines may now need to be extended based on these new Covid-19 related extensions issued by the IRS.