New Draft Form 8996 and Qualified Opportunity Zone Regulatory Reform

By Michael W. Hurwitz  |  November 12, 2019

Those who have been following the Qualified Opportunity Zones (QOZs) tax-incentive program will not be surprised when I say that its popularity and potential has resulted in close scrutiny of its efficacy and fairness by the national media. In fact, a national investigatory spotlight is now shining on several states where potential abuses of the QOZ regulations are purported to have occurred. These alleged abuses stem either from the selection process (especially when certain properties were added to state-approved QOZs after the initial list had been compiled) or from the eligibility of the property being sold to investors as an OZ. The controversy tugs on the balance between the potentially large tax break for wealthy investors and the goal of improving distressed communities that the QOZ program was created for—and whatever that balance may be, the optics are terrible: the fabled 1% getting richer at the expense of the poor.

By way of background, let me refresh you of the tax benefits bestowed upon investors who participate in the QOZ program. First, the investor will receive a temporary tax deferral on capital gains realized on the sale of appreciated assets that are reinvested within 180 days into a Qualified Opportunity Fund (QOF); second, the investor will receive an elimination of up to 10% or 15% of taxes due on the realized capital gains that are invested in the QOF is held for at least five and seven years respectively; and lastly, the investor will receive a permanent exclusion (the grand slam walk-off home run if you will) of tax (no tax due on the appreciation of the investment) when it sells the interest in the QOF investment is held for at least 10 years.

In its present state, Federal Form 8996 is used by a partnership or corporation to certify that it is properly organized to invest in QOZ property, and to annually report that the QOF meets the investment standard set forth in IRC Section 1400Z-2 (or to calculate the penalty if it fails to meet the investment standard). But was this enough to prevent perceived abuse? Evidently not!

Based on the intense scrutiny of QOZ program, both from the media and legislators (who are specifically calling for increased oversight and transparency), the Treasury has taken some initial steps to measure the impact of the new tax-incentive program by announcing the release of the new draft Form 8996 for QOZs. This version increases the reporting requirement and is intended to collect detailed information on the amount and type of investment.

You can read draft Form 8996 here.

There are several significant changes and revisions to Form 8996 intended to enhance the quality, transparency, and availability of the information reported by partnerships to the IRS and the partners of such business entities. Specifically, the released draft Form 8996 to be used by QOFs for the 2019 tax year requires the following information to be reported:

  • the Employer Identification Number of each QOZ business in which the QOF has an ownership interest;
  • the census tract location of the tangible property of the business;
  • the value (cost, applicable financial statement or another valuation method) of the QOF's investment; and
  • the value and census tract location of qualified business property directly owned or leased.

We understand the updated final versions of Form 8996 will be released shortly; in the meantime, QOFs should evaluate the additional information and/or time needed to comply with these proposed new reporting requirements.

I’ll soon take a look at the new draft Form 8997 that will require substantially more taxpayer reporting of their qualified QOF investments. Until then, let's keep the discussion going – feel free to contact me if you have additional questions related to this update.

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About Michael W. Hurwitz

Michael W. Hurwitz, CPA, MST, is a Partner and REIT Group Leader at Marks Paneth LLP. Mr. Hurwitz brings more than 30 years of experience and a versatile set of skills acquired through working for both public and private companies in the real estate sector.   His industry knowledge spans a vast number of areas including real estate tax issues, public and private real estate investment trusts (REITs), opportunity funds, portfolio restructurings, acquisitions and dispositions, partnership... READ MORE +

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