New Draft Form 8997 and Qualified Opportunity Zone Regulatory Reform

Readers of last week’s blog on new draft Form 8996 will recall that Internal Revenue Code Section 1400Z was enacted as part of the Tax Cuts and Jobs Act and designed to provide certain tax benefits for investments in Qualified Opportunity Zones (QOZs) through investments in Qualified Opportunity Funds (QOFs). 

A quick explanation: An eligible taxpayer elects first to defer eligible realized capital gains invested into QOFs, with federal Form 8949 to be filed along with a federal income tax return. (An eligible taxpayer is any taxpayer who would otherwise owe federal income tax on a realized capital gain on the sale or exchange of an investment.) Form 8996 is filed by the QOF and its investments in the QOZ property, while Form 8997 is filed by the eligible taxpayer, as it relates to the investment of the capital gain proceeds into the QOF.

On September 25, 2019, the Internal Revenue Service released another form in draft status: federal Form 8997 “Initial and Annual Statement of Qualified Opportunity Fund Investments.” It requires even more information to be reported concerning these investments by eligible taxpayers. Read draft form 8997 here

Federal Form 8997 will be used by an eligible taxpayer holding QOF investments at any point in time during the year to report their QOF investments, the amounts of their deferred capital gains and other information.

It’s possible that the new Form 8997 is a reaction to the shining spotlight the media and Congress have put on underlying issues of QOZ eligibility and fairness. Pressure to make certain properties qualify for QOZ status (in areas that had not initially measured up to OZ qualifying standards) has proven to be pervasive. The exposure of these purported abuses has led to a lot of negative coverage of those involved and of the OZ initiative itself.

So, what is new in terms of increased taxpayer reporting?

Specifically, the released draft federal Form 8997, to be used by eligible taxpayers for the 2019 tax year, requires investors to report the following information for each QOF investment:

  • Part I: the reporting of all QOF investments held at the beginning of the year; the employer identification numbers, date on which the QOF investment was acquired and a description of QOF investments along with the amount of short-term and long-term deferred gain invested in each QOF

  • Part II and III: the reporting of all QOF investments acquired and disposed of during the year

  • Part IV: amount of short-term and long-term gain to be included in taxable income

QOZs and QOFs are very much on the minds of the Treasury and watchdog agencies across the country. While the potential for abuse is very real, it is important not to lose sight of the value that our state and federal legislators felt the program brings as a meaningful and impactful way to drive direct investment into underserved areas. It is not surprising that flaws in the law have been identified. Recognizing and taking effective steps to rectify these flaws is the timely effect of Form 8997.

The Treasury Department is inviting the public and other federal agencies to comment on this new form and the information being requested. To ensure your concerns are considered, comments should be received on or before December 2, 2019.

Eligible taxpayers should speak to their primary tax service providers to better understand and ensure compliance with the new reporting requirements related to their QOF investments. We will continue to monitor these developments, as well as other Opportunity Zone changes that will undoubtedly come.

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