The end of the COVID Emergency on May 11, 2023 marked a pivotal moment for Qualified Opportunity Zone Businesses (QOZB). These businesses funded by the first quarter of 2023 now have the opportunity to accurately update their Written Working Capital Safe Harbor Plans by September 8, 2023.
What is 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" (WCSH) 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.
What Updates were Made to the Working Capital Safe Harbor Plans?
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 Regulations 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 Opportunity Zone (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 September 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 As most Written WCSH Plans are now outdated or no longer accurate due to the changes brought about by the pandemic, this is a valuable opportunity for QOZBs funded by the first quarter of 2023 to update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 the revised Written Plan, you need to send a copy to your tax advisor before September 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 your 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.
The HCVT OZ Team can assist you in updating your business plan or cash-flow projections to ensure compliance with the OZ Regulations.
A more detailed analysis of this issue can be found here.
Additional OZ Information and updates can be found on our website here.
Tax regulations can be complex and subject to updates. For the best advice tailored to your specific situation, contact Blake Christian, tax partner with HCVT, or Jay Darby with Joseph Darby Law PC.
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