ARIZONA OPPORTUNITY ZONES
IRS eases OZ deadlines in light of COVID-19
On June 4, the Department of the Treasury and the Internal Revenue Service released a notice of changes to some rules pertaining to Qualified Opportunity Funds and their investors, in light of the Coronavirus pandemic. The changes affect:
- The requirement that taxpayers invest in a Qualified Opportunity Fund within 180 days of realizing a capital gain to qualify for the related tax benefits.
- The requirement that Qualified Opportunity Funds have 90 percent of their capital invested in Opportunity Zone property or businesses, a standard that is assessed twice yearly.
- The 30-month period for a Fund or Qualified Opportunity Zone business to make substantial improvements to an Opportunity Zone property.
- The working capital safe harbor for Qualified Opportunity Zone Businesses.
- The 12-month reinvestment period funds have to redeploy capital.
Typically, investors have 180 days after realizing a capital gain to invest that gain in a Qualified Opportunity Fund or they do not get the related tax benefits. On April 9, 2020, the Department of the Treasury and IRS announced that any investor whose 180-day period would end on or after April 1, 2020 and before July 15, 2020 could have until July 15 to invest in a fund. That deadline has been extended to Dec. 31, 2020. The relief is automatic, but taxpayers still need to file a valid deferral election by completing forms 8949 and 8997 and filing them with a federal income tax return.
90 percent rule
A Qualified Opportunity Fund typically gets assessed at the mid-point and end-point of its tax year to assure that at least 90 percent of its assets are invested in qualified property or businesses in Opportunity Zones. Any fund whose tax year hits the last day of its first 6-month period or the last day of the tax year between April 1, 2020 and Dec. 31, 2020 and that fails to meet the 90 percent standard will automatically have that failure deemed reasonable and will not be penalized. However, the fund still must file form 8996 along with the fund’s federal tax return. (Enter 0 in Part IV, Line 8, which is the penalty amount.)
30-month substantial improvement period
Qualified Opportunity Funds and Qualified Opportunity Zone Businesses that own property that must be substantially improved typically have 30 months to complete that improvement (though that can be extended). The period of April 1, 2020 through Dec. 31, 2020 will be disregarded in determining any 30-month substantial improvement period.
Qualified Opportunity Zone Businesses may set aside working capital for projects that have a written plan and schedule if they follow the plan and schedule and use the money to accomplish it. The working capital “safe harbor” usually lasts 31 months, but it can be extended up to 62 months. Qualified Opportunity Zone Businesses that have working capital assets intended to be covered by the working capital safe harbor before Dec. 31, 2020, can receive up to 24 additional months to expend the assets, so long as the business otherwise meets requirements for the working capital safe harbor.
12-month reinvestment period
Qualified Opportunity Funds typically have 12 months to reinvest any proceeds from a return of capital or sale or disposition of OZ property. Under the new guidance, funds whose 12-month period includes Jan. 20, 2020, get up to an additional 12 months to reinvest in Qualified OZ property.
For more information:
News Coverage and Analysis:
OZ Best Practices
The White House Opportunity and Revitalization Council publicly released its May 2020 report on best practices last week, which covers best practices for local governments, state governments, charities and philanthropies and Opportunity Funds. It also addresses best practices around leveraging federal resources for Opportunity Zones.
Arizona’s Opportunity Zone nominations were submitted on March 21, 2018 and approved by the U.S. Treasury Department on April 9, 2018, making Arizona one of the first states in the nation to have its zones officially designated.
The federal Opportunity Zones program allows each state’s governor to nominate up to 25 percent of the qualifying low-income Census tracts as Opportunity Zones. It was created under a provision of the Tax Cuts and Jobs Act, which was signed into law December of 2017. Investors who reinvest capital gains monies in Opportunity Zone funds will receive reductions on capital gains taxes relative to the years of their investment.
Investments held 10 years: taxable amount of the capital gains reinvested is reduced by 15% and no tax is owed on appreciation. For example: $100 of capital gains is reinvested into an Opportunity Zone fund and held for 10 years. Tax owed on the original $100 is deferred until 2026, and taxable amount is reduced to $85 ($100 minus $15). Investor will owe $20 of tax on the original capital gains (23.8% of $85). No tax is owed on Opportunity Zone investment’s capital gain. Assuming a 7% annual growth rate, the after-tax value of the original $100 investment is $176 by 2028.*
Investments held 7 years: taxable amount of the capital gains reinvested is reduced by 15%. For example: $100 of capital gains is reinvested into an Opportunity Zone fund and held for 7 years, selling in 2025. Taxable amount is reduced to $85 ($100 minus $15). Investor will owe $20 of tax on the original capital gains (23.8% of $85). Assuming a 7% annual growth rate, the investor will owe $15 in tax (23.8% of $61) on the Opportunity Zone investment’s capital gain.*
Investments held 5 years: taxable amount of the capital gains reinvested is reduced by 10%. For example: $100 of capital gains is reinvested into an Opportunity Zone fund and held for 5 years, selling in 2023. Taxable amount is reduced to $90 ($100 minus $10). Investor will owe $21 in tax on the original capital gains (23.8% of $90). Assuming a 7% annual growth rate, the investor will owe $10 in tax (23.8% of $40) on the Opportunity Zone investment’s capital gain.*
If you have additional questions regarding Arizona’s Opportunity Zones, please contact us at firstname.lastname@example.org.