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The Tax Cuts and Jobs Act created opportunity zones as an economic development tool to stimulate investments in distressed communities. This tool extends tax advantages to investors in qualified opportunity funds, provided compliance with a wide range of time-sensitive deadlines is satisfied. As a result of the COVID-19 pandemic, many investors began to shy away from the opportunity zone program. Moreover, existing investors became increasingly concerned that they couldn’t satisfy these stringent deadlines. In response, the Treasury Department issued Notice 2020-39 to provide relief by extending some of those deadlines.
180-day investment period
Under the opportunity zone program, taxpayers defer recognizing capital gains if, within 180 days of when the gains would otherwise be recognized, they make an equity investment in a qualified opportunity fund. To alleviate investor concerns as to whether they should invest in an economically distressed community in the midst of a pandemic, the notice extends the 180-day period of any taxpayer whose investment deadline expires between April 1, 2020 and Dec. 30, 2020, to Dec. 31, 2020. As a result, additional time is available to investors to explore potential investment opportunities, and funds have a larger pool of qualified investors to pitch to, as they can now reach out to investors who realized capital gains as late as October of 2019.
90 percent investment standard
The opportunity zone program requires taxpayers to invest in qualified opportunity funds, which are corporations or partnerships (including LLCs) whose purpose is to invest in opportunity zones, and 90 percent of whose assets consist of certain businesses, or business property, located, or used, in an opportunity zone. This 90 percent test is measured by averaging the percentage of qualified property held by a fund six months after it is formed, or elects to be a qualified opportunity fund, and the last day of its taxable year. If this 90 percent investment standard is not satisfied, the fund must pay a penalty, unless it can establish that its failure to meet the standard was due to reasonable cause.
James Jack is the Executive Director and Head of the Business Owners Client Segment at UBS.
Aaron Lindstrom is the Regional Head of Transformation and Digital Partnerships for Allianz Trade in Americas, the world's largest and oldest provider of trade credit insurance. In his current role, Lindstrom is responsible for the execution of Allianz Trades' ambitious strategy to fundamentally transform the company for success in the digital era. He also drives the Region's digital partnerships by actively facilitating current and new partnership opportunities, and evolving current product offerings to serve market needs. In addition to the day-to-day responsibilities of his role, Lindstrom serves as a founding member for Allianz Trade's American Diversity & Inclusion Committee.
Lindstrom has 10 years of experience in the insurance industry. He joined Allianz Trade in 2012, serving as Sales Agent, then later Senior Sales Agent. Prior to joining the organization, he held positions with Enterprise Fleet Management and Enterprise Rent-A-Car.
Lindstrom has vast experience speaking at both regional and national events for organizations such as, The Risk Management Association, The National Association of Credit Managers, Washington Business Week, and The Associated Builders and Contractors. He is active in several regional trade organizations and frequently networks with startups and fintechs to stay up-to-date on the innovation of the trade credit insurance industry.
In his spare time, Lindstrom enjoys volunteering with organizations like Washington Trails Association and North Helpline. In the past, he has served on the boards of numerous non-profit organizations. When not hard at work for Allianz Trade or volunteering, Lindstrom enjoys traveling, camping, hiking and snow skiing.
Paul Williams is VP of Business Development at HONK Technologies, an on-demand automotive mobility services company. He has previously held a number of senior positions in vehicle salvage and recycling companies, including Newell Recycling Southeast, Aviva and Bluecycle.
Under the notice, any fund that fails to satisfy the 90 percent investment standard, and whose last day of its first six-month period, or last day of its taxable year, falls between April 1, 2020 and Dec. 31, 2020, is automatically deemed to have failed the test for reasonable cause. Funds may, therefore, wait to deploy capital until June 30, 2021, once the economic impact of the pandemic is more certain.
30-month substantial improvement period
Tangible property used in a trade or business counts toward satisfying the 90 percent investment standard if its original use commences in an opportunity zone, or it is substantially improved within any 30-month period beginning after the date it is acquired. In order to be deemed to be “substantially improved,” the improvements must double the adjusted basis of such property.
Pursuant to the notice, the 30-month substantial improvement period is tolled from April 1, 2020 to Dec. 31, 2020, thus extending the period in which to improve property by up to nine months, and allowing developers much needed relief in light of work shut down orders.
Working capital safe harbor
Investments in qualified opportunity fund businesses are treated as qualifying investments toward satisfying the 90 percent investment standard of a fund. These businesses must have certain ties to an opportunity zone, such as owning or leasing at least 70 percent of their assets in the zone and having at least 50 percent of their gross income derived from activities in the zone. Less than 5 percent of the average of the aggregate unadjusted bases of the property of such businesses can be held in the form of certain passive assets known as nonqualified financial property, but reasonable amounts of working capital held by the business are excluded from this category of assets.
Under the current regulations, a safe harbor rule allows qualified opportunity zone businesses to treat working capital assets as reasonable if, among other things, there is a written plan in place for the expenditure of such assets within 31 months (up to 62 months if certain additional requirements are met). If the safe harbor is satisfied, any cash held as working capital counts as a “good” property toward satisfying the 70 percent test. If the qualified opportunity zone business is located in a federally declared disaster area, up to an additional 24 months is allowed to expend these assets.
Initially it was unclear whether the 24-month extension applied, because President Trump, on March 13, 2020, declared a federal emergency, rather than declaring the entire country as a disaster zone. However, the notice states that, as a result of the president’s emergency declaration, any qualified opportunity zone business holding working capital assets under a safe harbor arrangement established before Dec. 31, 2020, is entitled to an additional 24 months to expend such assets.
12-month reinvestment period
Under the existing regulations, if a qualified opportunity fund sells qualifying property or receives a return of capital distribution from an investment in a qualified business, the proceeds qualify as “good” property under the 90 percent investment standard, provided they are reinvested in other qualifying property within 12 months. If any reinvestment plan is delayed due to a federally declared disaster, the fund is entitled to an additional 12 months to reinvest the proceeds, but the fund must invest the proceeds in the manner originally intended before the disaster.
The notice grants relief by confirming that, if any qualified opportunity fund’s 12-month reinvestment period includes Jan. 20, 2020, it has an additional 12 months to reinvest the sale proceeds, provided the proceeds are reinvested in the same manner as originally intended. This essentially grants relief to only those funds that sold property prior to Jan. 20, 2020, which is a limited population.
In sum, Notice 2020-39 grants taxpayers and fund managers much-needed extensions in order to satisfy the opportunity zone program requirements, allowing them to make sensible investments during these uncertain times.
