In light of the disruption of business activities this year and the economic uncertainty created by the ongoing COVID-19 pandemic, the Internal Revenue Service (IRS) issued Notice 2020-39 (the IRS Notice) on June 4, 2020, which provides investors, qualified opportunity funds (QOFs) and qualified opportunity zone businesses (QOZBs) with additional time to meet certain requirements under Section 1400Z-2 of the Internal Revenue Code, as amended, and the Treasury Regulations promulgated thereunder. This Alert identifies, as year-end 2020 approaches, some of the important tax-planning opportunities created as a result of the relief granted under the IRS Notice. Here is a detailed summary of the specific relief provided by the IRS Notice, including the extensions of timing deadlines for QOFs and QOZBs.
Year-End Planning Opportunities
The IRS Notice in many cases allows for an extension until Dec. 31, 2020, of the normal 180-day time frame that taxpayers are given under the opportunity zone rules to invest eligible gain in a QOF. As a result of this extension, many taxpayers now have until year-end 2020 to invest eligible gains from early 2020, and in some cases eligible gains from 2019, in a QOF and take advantage of the potential tax benefits resulting therefrom.
As a simple example, if Taxpayer A realized an eligible gain in the amount of $100,000 from the sale of property on Jan. 15, 2020, his original 180-day investment period would have ended July 13, 2020. Without the IRS Notice, if Taxpayer A had not invested that $100,000 in a QOF by that July date, he would have been precluded from taking advantage of the opportunity zone program with respect to that gain. However, since that date falls within the April 1-Dec. 31, 2020 time frame identified in the IRS Notice, Taxpayer A would now have until Dec. 31, 2020, to invest that $100,000 in a QOF.
A perhaps less obvious example would be if Taxpayer A was allocated $100,000 of eligible gain from his investment in Pass-Through Entity X (e.g., a tax partnership or S corporation) on his 2019 Schedule K-1. Assuming Pass-Through Entity X did not elect to invest the entire amount of that eligible gain in a QOF on behalf of all its equity owners, Taxpayer A could choose to invest his distributive share of that gain (i.e., $100,000) in a QOF. Because Taxpayer A could choose to begin his 180-day investment period with respect to that $100,000 on either (i) the last day of Pass-Through Entity X’s taxable year (i.e., Dec. 31, 2019) or (ii) the due date of Pass-Through Entity X’s 2019 tax return, without extensions (i.e., March 15, 2020),[1] he could select a 180-day investment period that would end within the time frame of April 1-Dec. 31, 2020. Thus, even though this $100,000 gain was realized in 2019, Taxpayer A should still have until Dec. 31, 2020, to invest such amount in a QOF and take advantage of the tax benefits resulting therefrom.[2]
The COVID-19 pandemic has delayed many opportunity zone projects. Therefore, the relief provided in this IRS Notice, which permits significant extensions of timing deadlines in many cases, can be very favorable to investors, project developers and businesses located in opportunity zones. As described herein, it creates year-end planning opportunities for taxpayers with 2020 eligible gains (and certain 2019 eligible gains, especially from investments in pass-through entities). Our team at BakerHostetler would be happy to discuss any questions on the relief provided in the IRS Notice, as well as year-end planning opportunities such relief may create.
[1] Dates included in subparagraphs (i) and (ii) assume Pass-Through Entity X is a calendar year taxpayer.
[2] In this example, if Taxpayer A did choose to invest his $100,000 distributive share of Pass-Through Entity X’s 2019 eligible gain in a QOF in late 2020, after filing his/her/its 2019 federal income tax return including the eligible gain in Taxpayer A’s taxable income (i.e., since the extended due date for 2019 calendar year tax returns has already passed, and so Taxpayer A’s 2019 return presumably has already been filed), Taxpayer A now should be able to amend his 2019 tax return to report his late 2020 QOF investment. Taxpayers should consult with their tax return preparers or other qualified tax advisers in these matters.
