If you were engaged in Opportunity Zone investment or New Markets Tax Credit transactions but were held up due to delays caused by coronavirus, take note. The IRS and Treasury have provided relief to businesses and investors, and you can still maximize the tax benefits of these programs.
Part of the 2017 Tax Cuts and Jobs Act, Opportunity Zones provide substantial tax breaks to investors who develop projects in economically distressed communities, in some cases allowing them to defer capital gains taxes indefinitely.
In a new Notice, the IRS is changing the following due to the coronavirus pandemic:
- Taxpayers who sold property for an eligible gain and who would have had 180 days to invest in a QOF to defer that gain, to have additional time. The new notice states that if a taxpayer’s 180th day to invest in a QOF would have fallen on or after April 1, 2020, and before Dec. 31, 2020, the taxpayer now has until Dec. 31, 2020, to invest that gain into a QOF. (The 180th day for some of these taxpayers was already postponed through July 15, 2020, under Notice 2020-23.) In addition, the notice says the period between April 1, 2020, and Dec. 31, 2020, is suspended for purposes of the 30-month period during which property may be substantially improved.
- A QOF’s failure to hold less than the 90% of its assets in Qualified Opportunity Zone Property on any semi-annual testing dates from April 1, 2020, through Dec. 31, 2020, is due to reasonable cause under section 1400Z-2(f)(3) of the Tax Code, and such a failure doesn’t prevent the entity from qualifying as a QOF or an investment in a QOF from being a qualifying investment. Thus, the QOF won’t be liable to face the statutory penalty under section 1400Z-2(f) due to such a failure during that period of time.
- For Qualified Opportunity Zone business projects that meet the requirements of the 31-month working capital safe harbor under the final regulations, these projects have up to an extra 24 months in which to spend their working capital.
- QOFs that received distributions of QOF stock or partnership interests as a return of capital or realized proceeds from a sale of that stock, partnership interest or qualified opportunity zone property have an extra 12 months in which to reinvest those amounts in the manner intended before the pandemic struck.
For more information, reach out to us, or visit the updated Qualified Opportunity Zones frequently asked questions page with answers about the relief being provided.
New Markets Tax Credit
The New Markets Tax Credit, or NMTC, was designed to increase the flow of capital to businesses and low-income communities by giving a modest tax incentive to private investors. The NMTC expires on Dec. 31, 2020, but it has been regularly extended by Congress over the 15 years it’s been in place.
Recent Notice 2020-49 gives community development entities (CDEs) and qualified active low-income community businesses (QALICBs) who are investing and conducting businesses in low-income communities until the end of the year to meet the following time-sensitive acts:
- Making investments: If a CDE is supposed to invest cash received in a qualified low-income community investment (QLICI) on or after April 1, 2020, and before Dec. 31, 2020, that cash investment is treated as invested in a QLICI to the extent it is invested by Dec. 31, 2020.
- Reinvestments: If a CDE is due to reinvest certain amounts of cash or payment in a QLICI on or after April 1, 2020, and before Dec. 31, 2020, the amounts are treated as continuously invested in a QLICI to the extent the amounts are so reinvested by Dec. 31, 2020.
- Expending amounts for construction of real property: If a QALICB is due to spend the proceeds of a capital or equity investment or loan by a CDE for construction of real property on or after April 1, 2020, and before Dec. 31, 2020, the proceeds are treated as a reasonable amount of working capital of the QALICB if so expended by Dec. 31, 2020.
Please reach out to your BGW team for more information regarding these tax credits and other incentives to investment.
For more information on navigating your business through the current crisis, including managing PPP loans, please visit our COVID-19 resource center or join us on an upcoming free webinar. Recorded sessions are available on our YouTube channel.