Investors seeking a set of capital gains tax breaks want the IRS and Treasury Department to extend key deadlines for the incentives as the Covid-19 pandemic slows down their developments.
The 2017 tax law created the benefit for investors who put profits into developments in nearly 9,000 census tracts, called opportunity zones, throughout the U.S. While huge stock market gains have been wiped out in the past few weeks, those with profits from the 2018 and 2019 boom years are seeing their projects stall or are wary of putting their money into startups or new construction as economic activity grinds to a halt.
Deadlines for the incentives are becoming harder to meet as construction is suspended in some areas, business supply chains are disrupted, and local housing authorities that approve building permits shut down or work remotely. Investors and business owners are wrangling with how to get documents notarized while governments are encouraging individuals to stay home and distance themselves from others.
The wish list goes beyond clarity on deadline delays. Investors who triggered capital gains by selling their stock, art, real estate, or other assets have 180 days to put them into a fund, and investors and their advisers want the government to provide them a longer period.
In a Wednesday letter, the Economic Innovation Group asked for an extension of the 180-day period and the 30-month period in which the value of investment in opportunity zone properties must be doubled. The group also requested clarification that employees of businesses financed by opportunity funds who work remotely will still be considered to be doing their jobs within the zone, to help funds meet the requirement that half of their gross income stem from business activities within a zone.
Still, they’re wary of the optics of prioritizing the incentives in this environment.
“It’ll look very bad on the administration if they prioritize OZ over putting food and money in the hands of people who need it most, and I completely agree with that,” said Robert Silverman, a New York-based manager of an opportunity fund with a development across the Hudson River in Jersey City.
Clarity from IRS
Final IRS regulations (T.D. 9889) provided two major deadline extensions for funds with projects or businesses in federally declared disaster areas under the Stafford Act.
Investors want clarity on whether they will get the extension automatically, since President Donald Trump has called the pandemic an “emergency,” not a disaster under the Stafford Act.
In its letter, EIG asked for confirmation that those extensions kick in under the emergency declaration.
Greg Genovese, president of Sound West Realty Capital LLC, based outside of Seattle, said he asked Treasury last week for clarity on the issue.
The case for extensions may came down to whether states become eligible for individual or public assistance, said Mike Novogradac, managing director of the accounting and consulting firm Novogradac & Co. LLP.
A group assembled by Novogradac & Co.—composed of investors, law firms, consultants, and developers—is drafting a letter to Treasury asking for confirmation that the two deadline delays in the rules are allowed, he said.
The IRS said it is aware of the concerns and is considering the issue. Treasury declined to comment.
What the Rules Allow
Normally, businesses financed by the funds have 31 months to spend their cash or other financial assets; if the zone is within a federally declared disaster area, they can get another two years to meet this deadline, “provided the project is delayed due to that disaster,” the rules say.
Funds also have a year to reinvest the proceeds of sales of parts of the businesses they finance so that they can pass a crucial test of their assets. If the delay in the reinvestment of the money is due to a federal disaster, the fund can get an additional year.
The rules already provide exceptions to certain deadlines when a government authority stands in the way.
“If the government orders you not to do construction work, I think that’s a good enough reason to say it’s caused by government inaction,” said Ken Weissenberg, a partner at EisnerAmper in New York, noting that non-essential construction has stopped in the state. “I don’t think the IRS would argue that too hard.”