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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.
Evan Ishida is a consultant with Winding River Consulting, serving the professional services industry in the areas of leadership, culture, and agile planning. He is also a partner at Thrive at Work LLC.
A subprime-related settlement between the government and Deutsche Bank provided meaningful benefits to some U.S. consumers in need, according to a new report. But the author acknowledged that those gains could prove illusory for some consumers given the coronavirus crisis.
Cathy Lanning serves as Senior Vice President for the Property & Casualty Marketing organization. In this role, she is responsible for the development and execution of integrated marketing plans for personal and commercial insurance products. Together with her team, she builds the brand and the Nationwide business leveraging data-driven direct marketing, partnerships, digital media, social media, cooperative agency marketing and lead generation strategies.
Most recently, Cathy led Strategic Partnerships where she established a large partnership portfolio with a data driven relationship-based selling approach. Together with partners such as alumni associations, cause organizations and sports organizations, Nationwide was able to understand the exact needs of a household and bring the right solutions at the right time to meet their protection needs. Under her leadership, the business unit grew by over 100% in five years.
Cathy joined Nationwide in 2007 as part of the leadership team that launched Nationwide Bank. Throughout her tenure at the company, she has held roles that require innovation, vision and team building. This includes establishing new digital marketing tools for agents, launching new products in the market, and establishing the Marketing Analytics organization. The Marketing Analytics organization delivered the first-generation marketing mix models, comprehensive digital analytics, and forecasting models, all of which helped Nationwide understand marketing effectiveness across channels and identified investment optimization pathways. The insights served the business lines across the company and opened new horizons for efficient growth and retention.
She has broad experience in brand management, analytics, partnership development, direct marketing, distribution marketing, innovation, product development and strategic planning. Prior to joining Nationwide, Cathy was the Brand Manager at The Scotts Company and Product Manager at WorldCom focused on Virtual Private Networks.
Cathy is a proud Ohio State University alumnus, holding a Bachelor of Science in Psychology, a Bachelor of Science in Business Administration (Marketing) and Masters in Business Administration. She is also a graduate from the Northwestern Kellogg Senior Women in Leadership program.
Outside of work, Cathy is a passionate advocate for education and community learning programs. To live this mission, Cathy serves on the board of The Ohio State University Alumni Association, The Girl Scouts of Ohio’s Heartland and The Wellington School.
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.
