In early June 2020, the Internal Revenue Service (“IRS”) issued Notice 2020-39 (the “Notice”) in response to COVID-19, providing welcome relief on looming deadlines for qualified opportunity funds and investors. The Notice provided relief in five areas:

180-Day Investment Requirement. To qualify for opportunity zone incentives, investors generally must roll over capital gains into a qualified opportunity fund within 180 days after the event triggering the gain. The Notice extends this deadline for investors whose 180-day investment period would otherwise end between April 1, 2020 and December 31, 2020. The new deadline is December 31, 2020.

90-Percent Investment Testing Dates. Generally, 90 percent of a qualified opportunity fund’s assets must constitute qualified opportunity zone property, as measured on two testing dates: the first one being the last day of the first six-month period of the fund’s taxable year, and the second one being the last day of the fund’s taxable year. The Notice provides relief from these testing requirements by providing that any failure to meet the 90-percent test on a testing date falling between April 1, 2020 and December 31, 2020 will be disregarded for purposes of determining whether the fund satisfies the requirements of the opportunity zone statute.

30-Month Substantial Improvement Period. Qualified opportunity funds and qualified opportunity zone businesses generally must substantially improve property within a 30-month period for that property to constitute qualified opportunity zone business property (i.e., to count as “good” property for purposes of the opportunity zone asset tests). The IRS has tolled the substantial improvement period for the time between April 1, 2020 and December 31, 2020, giving funds and businesses up to eight additional months to meet the substantial improvement test.

Working Capital Safe Harbor. Qualified opportunity zone businesses are restricted in the amount of cash and other nonqualified financial property they can have on hand. The opportunity zone statute provides a safe harbor, however, for reasonable amounts of working capital that are spent consistent with a written schedule within 31 months. The Notice extends this period for deployment of working capital by up to an additional 24 months.

Reinvestment Period for Qualified Opportunity Funds. Qualified opportunity funds that receive proceeds from the return of capital or the sale or disposition of assets generally have up to twelve-months to reinvest those proceeds into qualifying investments to maintain compliance with the opportunity zone rules. The Notice extends this period if a fund’s 12-month period includes January 20, 2020. If that is the case, then a fund has an additional 12 months to reinvest.

The relief provided by the IRS is good news for opportunity zone investors and funds who may have been bumping up against rigid deadlines or who otherwise felt pressure to make hasty investment decisions. The Notice gives funds and investors the breathing room to make thoughtful investment and other business decisions in a manner that is best not only for funds and their investors, but also for the low-income communities where the investments will be deployed. If you have questions regarding the Notice or the opportunity zone incentive, please contact Drew Kervick.