On January 19, 2021, the Internal Revenue Service (“IRS”) issued Notice 2021-10 (the “Notice”), which provides relief for Opportunity Fund investors from certain deadlines and testing requirements. The relief provided by the Notice extends prior relief granted by the IRS in 2020 to Opportunity Fund investors and is a response to the ongoing COVID-19 pandemic.

Extension of 180-Day Investment Requirement

Under section 1400Z-2(a)(1) of the Internal Revenue Code of 1986, as amended (the “Code”), taxpayers seeking to take advantage of certain tax benefits under the Opportunity Zones statute must invest any eligible capital gains in a Qualified Opportunity Fund (“QOF”) (i) within 180 days of the date the capital gain is realized, or (ii) in the case of a pass-through entity, (x) within 180 days of the last day of the taxable year of the pass-through entity’s taxable year or (y) within 180 days of the unextended due date of the pass-through entity’s federal return.

Under prior relief, if the 180-day period fell on or after April 1, 2020 and prior to December 31, 2020, the last day of the 180-day investment period was postponed until December 31, 2020. Under the Notice, the 180-day investment period is further extended to March 31, 2021. Effectively, this means that any gain realized by a taxpayer on or after October 5, 2019, can be preserved as an eligible gain outside of a QOF until March 31, 2021.

This relief is automatic, although a taxpayer is required to file all required forms. Taxpayers can also file amended returns to take advantage of this additional relief, if eligible capital gain was previously reported on a return.

30-Month Substantial Improvement Requirement

Real property that is intended to qualify as “qualified opportunity zone business property” under the Opportunity Zone statute (i.e., real property that qualifies as an eligible investment for a QOF or Qualified Opportunity Zone Business (“QOZB”)) must be “substantially improved.” Code section 1400Z-Z(d)(2)(D)(ii) imposes a 30-month substantial improvement requirement, which requires a QOF or QOZB to spend at least the amount of the adjusted basis of the real property on improvements within any 30-month period. Under the Notice, the period beginning April 1, 2020 and ending March 31, 2021 is disregarded in determining the 30-month period. In other words, if a 30-month period began on January 1, 2020, that period is tolled from April 1, 2020, until March 31, 2021, and, as of March 31, 2021, only three (3) of the 30 months will have elapsed.

Penalty Relief for the 90% Test for QOF

According to Code section 1400Z-2(d), a QOF must hold at least 90% of its assets in Qualified Opportunity Zone Property (“QOZP”), which is generally measured every six (6) months on the last day of the first six (6)-month period of the taxable year of a QOF and on the last day of the taxable year of the QOF (the “90% Test”). Code section 1400Z-2(f) imposes a penalty on a QOF for failing to satisfy the 90% Test. Relief from the penalty can be granted if the QOF has reasonable cause for failing to satisfy the 90% Test.

Under the Notice, if (i) the last day of the first six (6)-month period of the taxable year of a QOF or (ii) the last day of a taxable year of a QOF, in either case, falls between April 1, 2020 and June 30, 2021, then any failure of the QOF to satisfy the 90% Test during that period is deemed to be due to reasonable cause, and therefore the QOF is excused from any penalty that may otherwise be due. This relief is automatic, although the QOF must accurately report its 90% investment testing on any return and input a “0” where any penalty is reported.

Working Capital Safe Harbor

Generally, QOZBs cannot hold more than 5% of their assets as “nonqualified financial property” (as defined in the Code). There is, however, a “working capital safe harbor” that allows a QOZB to exceed the 5% threshold for a maximum of 31 months if the “nonqualified financial property” is held as cash and expended subject to a written working capital plan. The Notice grants an additional 24 months (for a total of 55 months, or 86 months for certain start-up businesses) to QOZBs to spend the working capital if the funds intended to be covered by the working capital safe harbor were held prior to June 30, 2021. In order to qualify, the QOZB must otherwise qualify for the safe harbor, meaning that there must be a written plan for the spending of the working capital and the working capital must be held in cash, cash equivalents, or certain short-term debt obligations.

12-Month Reinvestment Period for QOFs

Generally, the Opportunity Zones statute provides that a QOF must hold its QOZP for a minimum of 10 years. In the event, however, that a QOF disposes of QOZP and generates return of capital or sales proceeds prior to the expiration of the 10-year holding period, the Opportunity Zones statute permits the QOF’s investors to retain the Opportunity Zones tax benefits of their investment in the QOF if the QOF reinvests any such proceeds within 12 months from the date of disposition. Under the Notice, if the QOF’s original reinvestment period included June 30, 2020, then the QOF receives an additional 12 months (up to a maximum of 24 months) to reinvest the disposition proceeds, including any relief previously provided by the IRS. By way of example, if a QOF sold QOZP on January 15, 2020, it would have until January 15, 2022 to reinvest such proceeds.