Search Our Website:

In light of the continued effect of the COVID-19 pandemic on the economy, the IRS has issued additional guidance providing extended relief from tax deadlines and timetables relevant to the opportunity zone (OZ) program. The IRS issued Notice 2020-39 on June 4, 2020, which provided extensions to Qualified Opportunity Fund (QOF) investors, QOFs and Qualified Opportunity Zone Businesses (QOZBs) with respect to specific regulatory requirements applicable to each. On January 19, 2021, the IRS issued Notice 2021-10, which provides additional extensions of time for all of these requirements, as described below.

The 180-Day Requirement

A QOF investor has a 180-day time period within which to make an investment of deferred capital gain into a QOF. In some cases, a taxpayer will have a choice of 180-day investment periods.

What relief has been granted to taxpayers?

If the last day on which a taxpayer may make an investment in a QOF that satisfies the OZ requirements falls on or after April 1, 2020, and before March 31, 2021, then the last day for investment is postponed to March 31, 2021. This is an additional 3-month extension over that granted in previous guidance (which had extended the deadline to December 31, 2020). This relief is automatic; that is, there is nothing that a taxpayer has to send to the IRS to take advantage of this extension of time. However, taxpayers must still make a proper deferral election on their tax return and file Form 8997.


First Day of 180-Day PeriodLast Day to Invest in a QOF (Absent Relief)Last Day Taxpayer is Now Able to Invest in a QOF
October 5, 2019 April 1, 2020 March 31, 2021
December 31, 2019 June 27, 2020 March 31, 2021
March 15, 2020 September 10, 2020 March 31, 2021
October 3, 2020 March 31, 2021 March 31, 2021

Note that gain from as early as 2019 is still eligible for deferral as long as investment into a QOF occurs by March 31, 2021. In the pass-through context, a partner will be able to invest gain realized by a partnership any time in 2019 as long as that partner invests its allocable portion of the gain by March 31, 2021.  Note that Notice 2021-10 specifically allows a taxpayer to amend a prior return if the taxpayer decides to invest eligible gain that the taxpayer previously reported.

The 90% Investment Standard Applicable to QOFs

The OZ rules apply a 90% investment standard to QOFs – that is, 90% of a QOF’s assets must meet the definition of Qualified Opportunity Zone Property (QOZP). The determination of whether a QOF meets this standard is based on an analysis of a QOF’s assets on each of two testing dates during each taxable year. If the QOF fails to meet the 90% investment standard, the QOF must pay a penalty for each month that the QOF fails to meet that standard. However, this penalty is not imposed if the QOF can demonstrate that its failure to satisfy the 90% investment standard is due to reasonable cause.

What relief has been granted to taxpayers?

If either (i) the last day of the first six month period of a QOF's taxable year or (ii) the last day of the QOF's taxable year falls within the period beginning on April 1, 2020, and ending on June 30, 2021, any failure of the QOF to satisfy the 90% investment standard for that taxable year of the QOF will automatically be treated as due to reasonable cause.

What this essentially means is that for most QOFs, there are two taxable years that can be completely disregarded for purposes of the 90% investment standard. For example, for calendar year QOFs, any failure to comply with the 90% investment standard in either 2020 or 2021 will be ignored. In addition, and quite significantly, any failure to meet the investment standard during these years will be disregarded for purposes of determining whether the QOF or any otherwise qualifying investments in that QOF satisfy the OZ requirements for any tax year of the QOF. So, when the QOF is applying a test that requires compliance over time (e.g., the requirement that an interest in a QOZB owned by the QOF meet the QOZB requirements for 90% of the QOF’s holding period), the QOF can ignore, as necessary, both the 2020 and 2021 tax years. For example, if a calendar year QOF fails the 90% investment standard in both 2020 and 2021, and holds an investment in an entity that fails to qualify as a QOZB in both 2020 and 2021, the QOF should still be able to satisfy the 90% QOZB holding period test for that entity in 2022 because the QOF is able to ignore both prior tax years.

This relief is automatic but the QOF has to file Form 8996 with its timely filed federal income tax return (including extensions) for the affected tax year(s). The QOF will fill in all of the required information on all lines of the Form. However, the QOF will enter a “0” in Part IV, Line 8 (amount of the penalty).

The Substantial Improvement Requirement

In many cases, property held by either a QOF or a QOZB has to be “substantially improved” in order to be considered a good asset for purposes of the applicable tests. Generally, a QOF or QOZB has to meet the substantial improvement requirement within a 30-month period.

What relief has been granted to taxpayers?

For purposes of determining whether the substantial improvement requirement is met, the period beginning on April 1, 2020 and ending on March 31, 2021 is disregarded in determining any 30-month substantial improvement period (i.e., the 30-month requirement is tolled during this period of time). In other words, a QOF or QOZB has an additional 12 months to substantially improve property. Prior guidance had tolled the period through December 31, 2020; the most recent guidance provides an additional 3-month benefit.


First Day of 30-Month PeriodLast Day of 30-Month Period (Absent Relief)New Deadline to Complete Substantial Improvement
January 1, 2019 June 30, 2021 June 30, 2022
January 1, 2020 June 30, 2022 June 30, 2023

Working Capital Safe Harbor for QOZBs

In order to be considered a QOZB, an entity must meet certain requirements, one of which is related to the amount of cash that the entity is allowed to hold. For purposes of this limitation, reasonable amounts of working capital that are held in cash, cash equivalents, or debt instruments with a term of 18 months or less, are disregarded. The OZ rules provide a working capital safe harbor (WCSH) pursuant to which cash held by a QOZB is protected as reasonable working capital. One of the WCSH requirements is that there is a written schedule consistent with the ordinary start-up of a trade or business for the expenditure of the working capital assets within 31 months of the receipt of the assets by the business. A start-up business may utilize overlapping or sequential WCSH periods for up to 62 months if certain additional requirements are met. Both the 31-month and the 62-month periods may be extended by up to an additional 24 months with respect to a qualified opportunity zone (QOZ) within a federally declared disaster area.

What relief has been granted to taxpayers?

Pursuant to the Emergency Declaration issued by the President on March 13, 2020, beginning on January 20, 2020, major disasters exist in all 50 states, the District of Colombia and the 5 territories. Thus, as of January 20, 2020, every QOZ is located within a federally declared disaster area and, therefore, projects in those QOZs are entitled to the extension of up to 24 months for use of working capital assets protected by a WCSH. The most recent guidance confirms that QOZBs holding working capital assets before June 30, 2021 that were intended to be covered by the WCSH can receive up to an additional 24 months to utilize the funds, including any relief provided under the prior notice, which could extend the 31-month period to 55 months and the 62-month period to 86 months.

12-Month Reinvestment Period

A QOF generally has 12 months within which to reinvest proceeds from a return of capital or the sale or other disposition of QOZP. If and to the extent that the QOF reinvests the proceeds in QOZP within 12 months, the proceeds are treated as QOZP for purposes of the 90% investment standard. If the QOF’s plan to reinvest some or all of these proceeds in QOZP is delayed due to a federally declared disaster, the QOF may receive not more than an additional 12 months to reinvest the proceeds, provided that the QOF invests the proceeds in the manner originally intended before the disaster.

What relief has been granted to taxpayers?

In Notice 2020-39, IRS provided that if any QOF’s 12-month reinvestment period included January 20, 2020, that QOF received up to an additional 12 months to reinvest in qualified opportunity zone property provided that the QOF satisfied all OZ program requirements, and invested the proceeds in the manner originally intended before January 20, 2020. Notice 2021-10 further revised this extension, granting up to an additional 12 months for reinvestment periods that include June 30, 2020, so long as the reinvestment of the proceeds is done in the manner originally intended before June 30, 2020.   

The way in which this extension provision is written is problematic in practice. As an example, a QOF that realized proceeds to be reinvested on July 1, 2020 has been granted no relief from the regular 12-month timeframe for re-investment, even though the realization event occurred in the middle of the pandemic and the entire 12-month period will likely be affected by the pandemic.

Bottom Line

This newest IRS Notice provides much-needed additional relief for OZ investors, QOFs and QOZBs, allowing them more time and more flexibility in meeting the myriad of OZ requirements.

Our opportunity zone team, including Lisa Starczewski, Bruce Booken, and Mitchell Horowitz, are available to consult with clients engaged in opportunity zone investments to help ensure that you receive the maximum benefit from the grant of these extended deadlines and time frames.