IRS Guidance Provides Flexibility for Disaster-Related Extension of OZ Working Capital Safe Harbor

IM Report IRS Guidance Provides Flexibility for Disaster-Related Extension of OZ Working Capital Safe Harbor Debbie A. Klis · April 13, 2021

The Internal Revenue Service (IRS) will publish in April 14, 2021’s Federal Register a notice of proposed rulemaking for the opportunity zones (OZ) incentive that provides flexibility in the 24-month extension of the working capital safe harbor in the case of federally declared disaster areas.

The proposed rule that would also provide requirements that certain foreign persons and certain foreign-owned partnerships must meet in order to elect the federal income tax benefits provided by Internal Revenue Code Section 1400Z-2 and flexibility for working capital safe harbor plans, issued by the IRS April 12. Under sections 33 and 1462 of the Internal Revenue Code of 1986, as amended (the “Code”), a foreign person subject to withholding under sections 1445, 1446(a), or 1446(f) of the Code may credit the amount withheld against the
amount of income tax liability shown on the person’s tax return.

The proposed rule would allow, under certain circumstances, for the reduction or elimination of withholding under Section 1445, Section 1446(a), or Section 1446(f) on transfers that give rise to gain that is deferred under Section 1400Z-2(a) that addresses the risk of noncompliance by certain foreign persons.  The notice of proposed rulemaking provides guidance on standards certain foreign persons and foreign-owned partnerships must meet to receive federal tax benefits from the OZ incentive and regulations to reduce or eliminate withholding on transfers that create certain gain.

The proposed rule would allow qualified OZ businesses to revise or replace the original written designation and written plan and remain eligible for the safe harbor, provided that the remaining working capital assets are expended within the original 31-month period, increased by the 24 additional months provided. Taxpayers may rely on those changes retroactively for taxable years beginning after December 31, 2019.

Written or electronic comments and requests for a public hearing must be received by June 11, 2021. Requests for a public hearing must be submitted
as prescribed in the “Comments and Requests for Public Hearing” section.

The entire proposed rule is available at: https://public-inspection.federalregister.gov/2021-06143.pdf