A few weeks ago we posted about Qualified Opportunity Funds (QOFs) in a COVID-19 World. We covered capital raise considerations, due diligence questions, and steps that the Federal government has taken to support QOFs and QOF investors. Last week the IRS released Notice 2020-39, which provides additional relief and clarification for QOFs and their investors in response to the ongoing COVID-19 pandemic. This post outlines the material changes and areas of clarification that wealth managers should be aware of when evaluating whether a QOF is suitable for their clients.
- 180-Day Reinvestment Timeline Extension Part Deux—In April, the IRS released Notice 2020-23, which provided that if an investor’s 180-day investment window was set to expire between April 1, 2020, through July 15, 2020, that the investor would have until July 15, 2020, to make a qualifying investment. Notice 2020-39 takes this extension a step further, providing that if an investor’s 180-day investment timeline expires between April 1, 2020, and December 31, 2020, they will now have until December 31, 2020, to make a qualifying investment. This extension gives investors who realized capital gains going all the way back to October 5, 2019, (and their advisors), additional time to evaluate QOZ opportunities.
- 90% Asset Test Relief—QOFs are required to hold at least 90% of its assets in QOZ property, which is measured semi-annually. If the QOF fails the 90% test it is required to pay a penalty for each month it fails to meet that standard unless the failure is due to reasonable cause. Notice 2020-39 provides that if a QOF fails to meet the 90% test on testing dates that fall between April 1, 2020, and December 2020, no penalty will be imposed because the failure will deemed to be due to reasonable cause. The clarification regarding the reasonable cause exception should provide QOFs additional flexibility in deploying capital during 2020.
- Tolling of the Substantial Improvement Timeline—In order for property to be considered QOZ business property, the original use must commence with the QOF or the QOF must substantially improve the property within 30 months of acquisition. Notice 2020-39 tolls the 30-month substantial improvement period from April 1, 2020, through December 31, 2020, which gives QOFs an additional 9 months to complete these projects.
- 24 Month Extension on the Working Capital Safe Harbor—QOZ rules provide a working capital safe harbor that allows QOZ Businesses to characterize working capital as QOZ Business Property for up to 31 months. Treasury Regulations allow for two 31-month periods to be overlapped or applied sequentially and provide that the 31-month period may be extended for an additional 24 months if the project is located in a federally declared disaster area. Over the last few months, President Trump has approved a major disaster declaration for each state. Notice 2020-39 confirms that the 24 month extension is available to QOFs, which means that QOFs could possibly have up to 86 months, more than 7 years, to spend their working capital for a particular project.
The measures taken in Notice 2020-39 further shows the government’s belief that QOZ investment is going to be critical in aiding recovery after the COVID-19 pandemic. This relief allows Investors additional time to make qualifying investments and provides QOFs with extended timelines to meet various QOZ standards. Timeline extensions may be particularly helpful for QOFs that have experienced project delays because of workforce disruptions, permitting delays, or other factors. However, wealth managers and investors should also be aware that if QOFs take advantage of extended timelines to deploy capital and complete projects it will also impact the timing of distributions and investor returns.
Our team has provided due diligence coverage on a number of QOFs over the last year. Check out FactRight’s Report Center for more information on those programs. Or if you have any questions regarding QOFs or this post please feel free to email me or give me a call.