Opportunity Zone Magazine Volume 1, Issue 3 | Page 6
6 OPPORTUNITY ZONE MAGAZINE | VOLUME 1 • ISSUE 3
QOZP. Cash held by a QOF is not treated as QOZP.
However, a QOF can disregard cash contributed to the
QOF not more than 6 months before the testing date for
the 90% requirement. This means that QOFs generally
have a limited period of time to convert any contributed
cash into equity in an entity that is an QOZB under the
90% requirement. Accordingly, a newly formed calendar
year QOF that received investments from taxpayers during
December 2019 is required to contribute at least 90% of
such cash into equity in a QOZB on or before its June 30,
2020 testing date in order to avoid a penalty.
The notice provides that, in the
case of any QOF whose 90% semiannual
testing dates fall between
April 1, 2020 and Dec. 31, 2020,
any failures by the QOF to satisfy
the related 90% requirement shall
be treated as due to reasonable
cause and shall be disregarded.
the COVID-19 crisis. Because of the notice, any failure
of a QOZB to satisfy the 50% gross income test thereby
resulting in a failure by the QOF to satisfy the 90%
requirement on testing dates occurring between April 1,
2020 and Dec. 31, 2020 should not subject the QOF to a
penalty.
TOLLING OF THE 30-MONTH SUBSTANTIAL IMPROVEMENT
PERIOD
Background: One of the numerous requirements for an
entity to be considered as a QOZB is that the entity needs
to be engaged in a trade or business in which at least 70%
of its tangible property, owned or leased, by such entity
is qualified opportunity zone business property (OZBP).
OZBP is tangible property used in a trade or business of
the QOZB that was acquired by the QOZB by purchase
from an unrelated person after Dec. 31, 2017. Also,
either the original use of such tangible property in the
OZ must commence with the QOZB, or the QOZB must
“substantially improve” the tangible property. Note that
tangible property could also be considered to be OZBP
where it is leased by the QOZB when certain requirements
are met.
The original use of tangible property in an OZ starts on
the date any person first places the property in service
The Notice: The notice provides that, in the case of any
QOF whose 90% semi-annual testing dates fall between
April 1, 2020 and Dec. 31, 2020, any failures by the QOF
to satisfy the related 90% requirement shall be treated as
due to reasonable cause and shall be disregarded. This
means that a calendar year QOF would not be subject
to a penalty because it failed its June 30, 2020, and Dec.
31, 2020 testing dates as a result of not converting a
sufficient amount of invested cash received in December
2019 to equity in a QOZB. This change is a significant
development since many taxpayers invested cash into
QOFs in December 2019 in order to obtain the 15% partial
exclusion with respect to their qualifying investment.
Notable Comments: It should be noted that this provision
in the notice has a broader application than as described
above. A number of letters sent to Treasury and the
IRS requested changes to the situs requirement for the
50% gross income test for QOZBs. Under the 50% gross
income test, at least 50% of the total gross income of a
non-real estate QOZB must be derived from the active
conduct of a trade or business of such entity in the OZ (or
in multiple OZs).
The regulations provide three safe harbors for a QOZB
to satisfy the 50% gross income test. Two of these safe
harbors require 50% or more of the services for the QOZB
to be performed in an OZ based upon either actual hours
performed, or amounts paid for such performed services.
This could be difficult to satisfy when employees are
required to work remotely outside of an OZ as a result of
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