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Mar 05, 2021

IRS Notice 2021-10: Extending Relief for Qualified Opportunity Funds

Lora Bahrey-AmentRichard Stephenson, CPABy Lora L. Bahrey-Ament, CPA, and Richard D. Stephenson II, CPA


The Opportunity Zone program was designed to encourage investment in designated distressed areas in the United States by providing tax incentives to investors, which in turn would spur economic growth and job creation in these designated communities. Pre-COVID-19, participation in the Opportunity Zone program was surging, but since the pandemic momentum has slowed considerably.

On Jan. 19, 2021, the IRS published Notice 2021-10 to provide additional relief for Qualified Opportunity Funds (QOFs) and their investors, extending relief previously granted to QOFs under Notice 2020-39 due to the COVID-19 pandemic. The relief and requirement extensions discussed below are automatic. Aside from making appropriate elections, qualified taxpayers do not have to complete or file additional documentation to benefit from these provisions.

180-Day Investment Requirement

Taxpayers can elect to exclude from gross income the capital gains from the sale (or exchange) of any property to the extent proceeds are reinvested in a QOF within 180 days of the sale or exchange to an unrelated person. Notice 2021-10 extends the investment period, giving investors until March 31, 2021 to invest eligible proceeds in QOFs if the original investment period would have ended any time from April 1, 2020, through March 31, 2021. The taxpayer must make a valid deferral election and attach pertinent forms to a timely filed federal income tax return or an applicable amended return (See Form 8949, Sales and Other Dispositions of Capital Assets, and Form 8997, Initial and Annual Statement of Qualified Opportunity Fund Investments).

30-Month Substantial Improvement Period

CPA advising on building projectQOFs generally have 30 months to substantially improve property so it is treated as Qualified Opportunity Zone (QOZ) property. “Substantial improvement” is defined as investing funds sufficient to increase the owner’s adjusted tax basis in the improved property (not land) by 100% (essentially doubling the tax basis of the improved property). Notice 2021-10 disregards the period beginning on April 1, 2020, and ending on March 31, 2021, in counting the 30 months for substantial improvement, giving QOFs several additional months to substantially improve the property.

90% Investment Standard

To qualify as a QOF, at least 90% of assets within the QOF must be invested in QOZ property. This 90% standard is measured annually by averaging the percentage on two test dates: typically, the first date occurs at the end of the first six-month period in the QOF’s tax year, and the second is the last day of the QOF’s tax year. The percentage computation must be reported annually on Form 8996, Qualified Opportunity Fund. Under Notice 2021-10, if a QOF has a 90% investment standard test date that falls within the period starting on April 1, 2020, and ending on June 30, 2021, any failure of the QOF to satisfy the 90% investment requirement for that tax year is deemed to result from reasonable cause. Failing to meet the investment standard should not alone disqualify the QOF or investments in the QOF, and no penalties should be owed. Even though the relief under Notice 2021-10 is automatic, the QOF must accurately complete Form 8996, and on Part IV, Line 8 (Penalty), the QOF should report “0.” The accurately completed Form 8996 must be filed with the QOF’s timely filed federal income tax return (including extensions) for the affected taxable year.

Working Capital Safe Harbor

At the beginning of a project, many QOZ businesses will elect to use the “working capital safe harbor,” which generally gives the QOZ business up to 31 months to use the QOF’s capital to build the project or establish the trade or business. The final QOZ regulations provide that if a QOZ business is located within a federally declared disaster area, the QOZ business may receive not more than an additional 24 months to complete its working capital plan. Notice 2021-10 provides that, as a result of the current federally declared disaster covering the entire country (COVID-19 pandemic), all QOZ businesses with assets covered by a working capital safe harbor plan in place before June 30, 2021, receive not more than an additional 24 months to expend the working capital assets of the QOZ business. Added to the 31-month period, this extends the working capital expenditure period up to 55 months for qualified capital: under certain circumstances relating to working capital safe harbors for start-up businesses, the expenditure period can extend up to 86 months. It is important to note that this safe harbor is not available for QOZ trades or businesses that are invested in and operated directly by a QOF. Only QOZ businesses are provided this relief.

12-Month Reinvestment Period

QOFs that sell a property or receive distributions from a QOZ business as a return of capital and reinvest the proceeds within 12 months in qualified property may treat the proceeds as qualified property, provided that, prior to reinvestment, the proceeds were held in cash, cash equivalents, or debt instruments with a term of 18 months or less. For any reinvestment period that includes June 30, 2020, Notice 2021-10 extends the 12-month reinvestment period up to an additional 12 months, resulting in a maximum reinvestment period of 24 months (provided the QOF satisfies the general requirements and invests the proceeds in the manner the QOF originally intended before June 30, 2020).

Pennsylvania Tax Implications

Act 13 of 2019, which was signed into law on June 28, 2019, became effective for tax years beginning Jan. 1, 2020. Act 13 clarifies that Pennsylvania tax treatment of Qualified Opportunity Zone net gains/losses and dividends now mirrors U.S. federal tax treatment. Therefore, Pennsylvania’s treatment for deferred capital gains reinvested into a QOF should take into consideration extensions granted under Notice 2021-10.

Steps to Be Taken

Notice 2021-10 extends relief previously provided in Notice 2020-39, which had extended various deadlines. The tolling (i.e., stopping the time-period from running), for the substantial improvement period and the extension of the working capital safe harbor period are potentially large benefits for deals slowed by the pandemic. The waiver of penalties associated with a QOF’s failure to qualify in 2020 and the first half of 2021 may mitigate lost Opportunity Zone benefits caused by the pandemic. Since these measures are automatic, QOFs and their investors need not take additional steps to receive relief and extension of the program requirements, apart from completing the forms and elections previously discussed. Taxpayers should consult their tax advisers regarding the implications of relief granted under Notice 2021-10.


Lora L. Bahrey-Ament, CPA, is a tax manager with Louis Plung & Company in Pittsburgh. She can be reached at lora.ament@louisplung.com.

Richard D. Stephenson II, CPA, is senior tax accountant for Louis Plung & Company in Pittsburgh. He can be reached at rstephenson@louisplung.com.


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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.