An Internal Revenue Service amendment designed to help Opportunity Zone (OZ) projects that struggled amid the COVID-19 pandemic is leaving some in the industry with unanswered questions and fears of getting disqualified from OZ’s signature tax benefits.

The federal agency amended its rules in 2020 to provide automatic deadline relief to Qualified Opportunity Funds, allowing the investment groups an extra 24 months to move funds into their OZ endeavors. The original regulations provided a working capital safe harbor so businesses in OZs could hold money for up to 31 months if they were "substantially consistent" in following a written plan.

Where are the IRS guidelines that clarify what “substantially consistent” mean?

However, OZ investors say the IRS amendments haven’t clarified what “substantially consistent” means for projects that were forced to change their written plans because of the pandemic.

Steven R. Meier, a tax partner at Seyfarth Shaw LLP’s Chicago headquarters, has noted that the IRS’ silence on this matter is expected to particularly affect hotels, restaurants and entertainment facilities — types of businesses that have either temporarily or permanently changed because of the novel coronavirus and the altered economic landscape it has wrought.

“With projects that are underway and invested into the business, there remains a quandary as to how to deal with possibly having to radically adjust a business plan,” Meier told media. “It would have been nice for the IRS to acknowledge that plans that went into place in the middle of March [2020] are probably about as good as the paper they’re written on.”

OZ groups are advocating for clearer guidelines from IRS

An OZ working group at Novogradac has raised concerns on this issue as well. In a May 6, 2020 letter, the panel noted how many in the OZ community would need to adjust their business plans and could therefore be out of compliance with the working capital safe harbor.

The group asked the federal government to temporarily waive the requirement.

Clint Edgington, a partner at Nest Opportunity Fund based in Dublin, Ohio, called the IRS’ guidance on whatever a “written plan” is a “relatively murky” thing since the beginning of OZ.

He said his firm believes because the IRS did provide the 24-month extension under a COVID-declared disaster, “We believe, practically speaking, it implies that those [written] plans can be changed.”

Edgington added that he still feels confident, despite the IRS’ lack of clarification, that Nest will work through it.

“Fortunately for our fund and our partners, our projects are diversified, smaller and, for the most part, haven’t been impacted by COVID-19,” he said. “While we have two smaller projects that may require more than the initial 31 months due to permitting issues that were slowed due to COVID, our fund and QOZBs will still be well within our testing parameters, even if the IRS takes an opposing view.

Powered by Froala Editor