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 OPPORTUNITYZONE.COM