Opportunity Zone Program

The opportunity zone program was created through the passage of tax reform in 2017, also known as the Tax Cuts and Jobs Act (P.L. 115-97). Over $10 billion dollars have been deployed into qualified opportunity zone investments. While the investment has slowed, COVID-19 and additional guidance has created renewed interest in utilizing this program to assist with underserved communities and to provide tax relief for investors. Discussions and drafts of proposed bills would extend the program and provide other favorable provisions to investors. As a result, planning opportunities exist for new investments into the program, as well as for current investments.

Recent Guidance

Treasury and the IRS released final regulations and proposed regulations at the end of 2019. Additional guidance has been released in the form of correcting amendments, Notice 2020-23, and Notice 2020-39.
Notice 2020-39

In Notice 2020-39 the IRS provided relief to qualified opportunity funds (QOFs) and their investors in response to the COVID-19 pandemic. Additionally, the IRS has updated its Qualified Opportunity Zones frequently asked questions. The guidance provided the following relief:


2020, through December 31, 2020, will be considered to be due to reasonable cause and that the failure will not prevent qualification of an entity as a QOF or an investment in a QOF from being a qualifying investment. The QOF will not be liable for the statutory penalty for any failures to meet the asset testing during this period. The QOF, however, must complete all lines on the annual filing of the Form 8996 – Qualified Opportunity Fund. This relief is automatic. If this exception applies, the taxpayer should place a zero in Part IV, line 8, “Penalty” on this form.

Correcting Amendments

The Treasury Department and the Internal Revenue Service recently issued correcting amendments to the opportunity zone final regulations under Section1400Z, that were previously released on December 19, 2019. The correcting amendments are effective on April 1, 2020, and, are applicable as of January 13, 2020. While there were numerous changes, the following provides a summary of the key provisions.

The correcting amendments further provide language that appears to state that during a working capital safe harbor period, an entity meets the 70% tangible property standard. Under this interpretation, the 70% tangible property standard would be suspended during the safe harbor period. As such, non-QOZB property (i.e., bad assets) would not impact the asset requirement. This provision is very beneficial for start-up entities.

Further, the correcting amendments clarify that working capital itself is never treated as QOZB property for any purpose. It is not included in determining the 70% tangible property standard.

Planning Opportunities

Delay Investment in Fund Post-June 30

A QOF that receives an investment before June 30, 2020, will be required to invest those funds within six months, or December 31, 2020. If a QOF delayed the receipt of those funds until sometime in July 2020, then the QOF will have until June 30, 2021, to invest those funds into qualified opportunity zone property. The testing is done every six months and the investment is given six months to be deployed, so there would be no issue with the December 31, 2020, testing. The next testing period will be June 30, 2021. Planning the receipt of funds is important and provides some flexibility.

Increased Stock Sales – Market Uncertainty

Many investors sold stock in reaction to COVID-19 to reap the capital gains. As a result, investors may have capital gains available to invest. Previously, some investors did not like the 10-year required holding period required to escape taxation on the gain during the time of the investment in the QOF. During this time of market uncertainty, the 10-year investment holding period may be more appetizing. The 10-year period may leap frog this uncertainty period. As a result, investors are looking at real estate projects and other businesses that may not have been previously considered. QOFs should be prepared to receive these funds that will likely expire in late summer or early fall.

Vacant Properties

The final regulations provided that the “original use” provision does not apply to property that has been vacant for three years, if it was bought by the QOF after 2018. The “original use” test would have required the investor to substantially improve the property. This is not required for these vacant properties, which would eliminate the significant funds required for substantial improvements. A building or land meets the rule of being vacant if 80% of its usable space is empty. As such, a large property that is still 20% leased would likewise be exempt from the “substantial improvement” rule. Additionally, buildings acquired directly from the government through bankruptcies or tax sales would not have to be substantially improved. There will likely be numerous abandoned, foreclosed, and government tax sales properties in opportunity zones as a result of COVID-19. These properties may now be more attractive due to the elimination of the “substantial improvement” requirement.

Net Operating Loss (NOL) Carryback

The CARES Act permits NOLs from 2020 to be carried back five years to offset taxable income. This can be particularly valuable if it is carried back to a year with a pre-tax reform tax rate (e.g., 35% for corporations). As such, investors want to increase the NOL in 2020. Taxpayers may wish to defer the gross (not net) capital gains by investing in a QOF, even in a loss year.

Bifurcation of Section 1231 Gains and Losses

Under the final regulations, investors do not need to net Section 1231 gains with Section 1231 losses. As such, investors do not need to wait until year end to invest in opportunity zones. Rather, an investor can invest the capital gain on the sale of business property into a QOF, while maintaining the loss amount separately. Accordingly, the Section 1231 loss, to the extent that it can create a NOL, can be carried back for five years, generating cash refunds (especially if it is at a pre-tax reform rate).

Bonus Depreciation and Cost Segregation

Property acquired and placed in service between September 27, 2017, and December 31, 2022, is eligible for 100% bonus depreciation. The CARES Act corrected the depreciable life of QIP from 39 years to 15 years. QIP is now bonus-eligible property. Pursuant to the opportunity zone final regulations, there is no bonus recapture. If the property is held for the 10-year period, an investor may create a permanent tax benefit. As a result, cost segregation studies for non-commercial property are extremely valuable. You would get the deductions for bonus depreciation with no recapture and the step up in basis at the end of the 10-year holding period. If the QOZB elects to be a real property trade or business to prevent the Section 163(j) limitation, then bonus depreciation is not permitted. However, QIP would be reduced from a 39-year life to a 20-year life, which still provides tax benefits to the investors. Bonus depreciation may likewise result in NOL carrybacks that could be extremely valuable.

Working Capital Safe Harbor – Government Approvals

The final regulations also allow a QOZB to extend the 31-month period for project delays resulting from government approvals. Many government entities are limiting services. As such, any delay in permits or other approvals should be documented.


With COVID-19 and the resulting financial crisis, the Qualified Opportunity Zone program is a valuable tool for purposes of revitalizing distressed communities. Some state plans have already utilized the infrastructure of the program for their own investment incentive programs. Opportunity zones can assist in producing public-private partnerships that are critical for the recovery of distressed communities and will be needed for an increase in affordable housing and mixed-use projects, as well as job creation. Congress could provide additional incentives during this time of uncertainty to bring in additional capital investments. How Congress enhances the opportunity zone program will likely impact its durability. Funding for underserved communities is more important than ever and the opportunity zone program may be a key tool to revitalize these communities and the economy.