New Draft Federal Forms Issued in Response to Heightened Scrutiny Of QOZ Program

By Michael W. Hurwitz  |  November 19, 2019

The Qualified Opportunity Zones (QOZs) tax-incentive program has recently come under heightened scrutiny by the national media due to alleged abuses. 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 Opportunity Zone. At issue is 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.

In response to this enhanced scrutiny, the Treasury has taken some initial steps to measure the impact of the new tax-incentive program by announcing the release of two new draft forms -- Form 8996 and Form 8997 for QOZs. Taxpayers investing in Qualified Opportunity Funds (QOFs) need to understand these new forms and comply with the new reporting requirements.

QOZ Benefits

By way of background, several tax benefits are bestowed upon investors who participate in the QOZ program. First, the investor will receive temporary tax deferral on capital gains realized on the sale of appreciated assets that are reinvested within 180 days into a 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 and are held for at least five and seven years respectively. Finally, the investor will receive a permanent exclusion of tax (no tax due on the appreciation of the investment) when it sells the interest if the QOF investment is held for at least 10 years.

Federal Form 8996

In its present state, Federal Form 8996, "Qualified Opportunity Fund," 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).

Based on the intense scrutiny of the 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. Read draft Form 8996.

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 (EIN) 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.

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.

Federal Form 8997

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.

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. 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 EINs, the 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: the amount of short-term and long-term gain to be included in taxable income

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.

Conclusion

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.


About Michael W. Hurwitz

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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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