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How can I document that I originally planned to make land improvements?
When treating land as QOZ business property, you have to have an expectation or intention of substantially improving the land within 30 months. What if I change my mind or the business needs change? How can I document this change?
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This understanding is not correct. Land must merely be used in a trade or business in order to be excluded from compliance testing. There is no measurement of "intention" or "expectation." The foregoing is general information and not legal or tax advice.
I am not sure that you have this flexibility. In addition to having a plan to develop the property over 31 months, the proposed regulations specify that you must follow the plan. Material changes to the plan appear to go beyond what is allowed.
The Proposed Regulations dictate that you have to have a written detailed 30-month plan and that you must "reasonably follow" that plan. If there is a minor deviation from the plan, documentation is simply a matter of providing detailed internal memorandums explaining the deviation. If you are planning to scrap the original plan and start over, there is no statutory guidance that protects you from failing the safe harbor test. Therefore, I would surmise that the best you could do is document any new detailed plan, but that it should likely be executed within the same original 30-month timeframe.
The regulations state that a written plan and schedule must be prepared and kept in order to qualify for the 31 months working capital safe harbor. As to the 30 month period for substantial improvement, there is no much guidance. I will recommend to have a very detailed schedule and plan and carefully review the specific requirements for Land. In addition, there is no escape gate if the 30 month period is not complied with. The second set of regs state that holding land for investment does not qualify. Land must be an integral part of an active trade or business.
This kind of issue comes up in tax matters with some frequency. A variety of tax characterizations depend on the taxpayer's "intent." I’d have a file that shows my plans, and if there was a reason to change my investment intentions, I'd document what led to my change in plans. Changes in the marketplace, having a major tenant fall through, having the seller go elsewhere, having a finance source withdraw, etc. I'd expect that some written backup for that kind of change would be sufficient to justify your change. Now, having said that, you are still NOT ASSUMED to be okay. The presumption is that you failed (unless you still manage to pass the 90% test by the next testing date, despite the failure of this particular project). However, even with a failure, if you have "reasonable cause," then you won't owe a penalty. As of today, the IRS has not given us any guidance on whether and how you have to notify the IRS of your change in plans, or what criteria they will apply to avoid the penalty. Still, I think that this is the proper way to handle this.
Careful documentation will be the key to supporting your original plans and the reason things changed. Documentation would include budgets, architectural renderings, potentially permit applications or approvals, etc. Equally important is documenting why you changed your mind.
A 31-month working plan is required to take advantage of the working capital exception at the development entity level. The expenditures should largely match the plan (typically a construction/budget plan) but you rightly note that things change at times. If the delay is due to government delays (such as permitting), the 31-month plan can be extended by the time related to the government delay. There is no clear guidance on how to document a change in plan or use. I tend to think that if the funds are deployed such that a qualifying asset exists at the end of the 31 month period that the IRS will be lenient in documentation as the desired economic activity will have occurred. Have some existing real plans that can be actioned upon and if you need to change, I'd get a detailed memo drafted for your file and have an attorney review it. I can't tell you how many times I get something from a client that they think is good enough for some legal purpose and it really needs dressed up more to look good in case of an audit. Happy to help, 918.594.0819. I suspect we'll have more rules on 31-month plans by the end of the year.
In answer to your question, if the new use no longer qualifies as a QOZB, your investors would no longer be entitled to the OZ Benefits. As long as the new use still qualifies and you make the investment within the required timeframe, it shouldn’t matter whether you executed the original plan or a new one.
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