IRS Notice 2020-39: Additional Opportunity Zone Relief Due to the COVID-19 Pandemic

Kevin Matz, Esq., CPA, LLM
Published Date:
Aug 1, 2020

In an effort to extend additional relief to opportunity zones in light of the COVID-19 pandemic, the IRS issued Notice 2020-39 on Jun. 4, 2020. It provides very significant relief for qualified opportunity funds (QOF) and their investors. 

This article briefly reviews the most critical points. 

Investment Period Expansion

Notice 2020-39 expanded the 180-day investment period for QOF investors, with postponement to Dec. 31, 2020, for QOF investments that would otherwise be required on or after Apr. 1, 2020.

Generally, a taxpayer has 180 days from the date (or deemed date) of a gain resulting from a sale or exchange with an unrelated person to invest the proceeds into a QOF. Notice 2020-39 provides that if an investor's 180-day period ends on or after Apr. 1, 2020, and before Dec. 31, 2020, the last day of that investment period is postponed to Dec. 31, 2020. (Notice 2020-23 had previously granted such postponement relief through Jul. 15, 2020.)  

This relief is automatic, but the investor still needs to make a valid deferral election on a timely filed tax return, including extensions (or on an amended return, if applicable). 

Reasonable Cause Exception

A reasonable cause exception applies in 2020 to the 90% investment standard for QOFs.

In the case of a QOF that has a last day of the first six-month period or last day of the taxable year that falls within the period beginning on Apr. 1, 2020, and ending on Dec. 31, 2020, any failure by that QOF to satisfy the 90% investment standard for that year for investment in QOZ property or QOZ businesses shall be deemed attributable to "reasonable cause."

This means it will be disregarded for purposes of determining whether the QOF—or any otherwise qualifying investment in that QOF—satisfies the 90% investment standard for QOFs. Once again, the relief is automatic. 

Substantial Improvement Period

The 30-month substantial improvement period for QOFs and qualified opportunity zone businesses (QOZB) will disregard the period between Apr. 1, 2020, and Dec. 31, 2020.

Tangible property is treated as QOZB property if it’s used in a trade or business of the QOF or QOZB. It must also satisfy three general requirements. One is that the original use of post-2017 acquired tangible property must begin with the QOF, or the QOF must “substantially improve” that property. The substantial improvement requirement is met only if, within a 30-month period beginning on the date of acquisition of the acquired tangible property, improvements are made to the property in excess of its original cost. 

Significantly, the IRS notice provides that for the purpose of the substantial improvement requirement with respect to the property held by the QOF or QOZB, the period beginning on Apr. 1, 2020, and ending on Dec. 31, 2020, is disregarded in determining any 30-month substantial improvement to more than double the original cost basis of the tangible property. 

Working Capital Safe Harbor Extension

The working capital safe harbor for QOZBs Is extended up to an additional 24 months.

The final QOF regulations allow QOZBs a working capital safe harbor as an exception to meeting the requirement that no more than 5% of a QOZB’s assets can consist of certain financial property. The working capital needs to be held in cash, cash equivalents, or debt instruments with a term of 18 months or less. 

One of the requirements of this working capital safe harbor is that there is a written schedule consistent with the ordinary start-up of a trade or business for expenditures of the working capital assets within 31 months of receipt of the assets by the business. It’s possible to extend the working capital safe harbor to 62 months in certain instances, and if a QOZB is located in a QOZ within a federally declared disaster area, the QOZB may receive up to an additional 24 months to expend its working capital assets.  

Significantly, as a result of President Trump's emergency declaration, all QOZBs holding working capital assets that were intended to be covered by the working capital safe harbor before Dec. 31, 2020, are eligible to receive up to an additional 24 months to expend their working capital assets. 

Reinvestment Period Extension

The 12-month reinvestment period for QOFs is generally extended for an additional 12 months.

Generally, if a QOF sells or disposes of some or all of its QOZ property, or if a distribution with a QOF's QOZB is treated as a return of capital, and the QOF reinvests the proceeds in QOZ property by the last day of the 12-month period beginning on the date of the distribution, sale, or disposition, the proceeds are treated as QOZ property for purposes of the 90% investment standard. This is provided that the proceeds are continuously held in cash, cash equivalents, or debt instruments with a term of 18 months or less. 

Under Notice 2020-39, if Jan. 20, 2020, falls within a QOF's 12 month reinvestment period, that QOF receives up to an additional 12 months to reinvest in QOZ property some or all of the proceeds received by the QOF from the return of capital or the sale or disposition of some or all of the QOF's QOZ property.

Kevin Matz, JD, Esq., CPA, LLM, is a partner at the law firm of Stroock & Stroock & Lavan LLP in New York City. His practice is devoted principally to domestic and international estate and tax planning, family offices, and qualified opportunity zone (QOZ) funds, and he is a Fellow of the American College of Trust and Estate Counsel (ACTEC) and a co-chair of the Tax Committee of the Trusts and Estates Law Section of the New York State Bar Association. Mr. Matz is also a prior secretary/treasurer of the NYSSCPA and a past president of the Foundation for Accounting Education (FAE) Board of Trustees, and currently serves as both a NYSSCPA director and as a FAE trustee. He writes and lectures frequently on estate and tax planning topics. He can be reached at or 212-806-6076.

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