The end of the COVID emergency on May 11, 2023, marked a pivotal moment for qualified Opportunity Zone businesses. These businesses funded by the first quarter of 2023 now have the opportunity to accurately update their written working capital safe harbor plans by Sept. 8, 2023.
So, what is the working capital safe harbor plan?
Under Code Section 1400Z-2, a QOZB must keep less than 5% of its assets in “nonqualified financial property,” with reasonable working capital as an exception to this rule. Prior to April 12, 2021, QOZBs were granted the “working capital safe harbor,” which allowed them to hold any amount of working capital for 31 months, provided they had a well-crafted written plan and a solid cash-flow analysis showing how the OZ funds will be invested. All this was aimed at meeting the semi-annual 70% QOZB qualified asset test.
However, the regulations did not address situations during the COVID emergency, where the original written (business) plan became difficult or impossible to implement due to the ongoing crisis.
Updates to the WCSHP
In response to the need for disaster relief, the IRS issued proposed regulations on April 12, 2021, allowing QOZBs to adjust their written plan and cash-flow schedule within 120 days after the disaster’s end, including an extra 24 months due to the COVID impact (see “Potential Opportunity Zone extension for federally declared disaster zones tax alert). These April 12 proposed regs can be relied upon for tax years beginning with 2020, even though they were never finalized.
The COVID emergency is over … now what?
The end of the COVID emergency on May 11, 2023, holds significant implications for QOZBs and OZ fund managers. According to proposed OZ regulations issued in 2021, QOZBs are allowed to amend their required written plan under the WCSH rules for up to 120 days after the official end of the COVID emergency.
This 120-day period for amendments will expire on Sept. 8, 2023. As most written WCSH plans are now outdated or no longer accurate due to the changes brought about by the pandemic, this is a valuable opportunity for QOZBs funded by the first quarter of 2023 to update their written plans to reflect the latest developments accurately.
As there has been no official response to this specific concern, taxpayers are advised to act promptly. Those relying on written plans dating back to the COVID era should revise them to bring them up to date for any strategy changes.
To finalize a revised written plan, they need to send a copy to their tax advisor before Sept. 8, 2023, as proof of its existence before the deadline. The IRS’s approach to auditing written plans remains uncertain, making it crucial to demonstrate that an updated plan was in place by the cut-off date. Acting now can safeguard against potential audit issues and ensure compliance with the current OZ regulations.
— With additional reporting by Malachi Trujillo, tax intern at HCVT
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