The Tax Cuts and Jobs Act introduced IRC §1400Z-2 Special Rules for Capital Gains Invested in Opportunity Zones. This section allows a taxpayer to elect to defer or exclude from gross income gain on the sale or exchange of any property to an unrelated party in the tax year of the sale or exchange if the gain is reinvested in a Qualified Opportunity Zone ("QOZ") within 180 days of the sale or exchange. The amount of gain that can be deferred or excluded is equal to the amount of gain invested in the QOZ. Investment in QOZ is done through an investment in a Qualified Opportunity Fund ("QOF").
This blog discusses the requirements an entity must meet in order to become a qualified opportunity fund. For previous discussions on qualified opportunity zones, see the following links.
The IRS has allowed for qualifying entities to self-certify as a Qualified Opportunity Fund. This self-certification will significantly simplify the compliance process for becoming a Qualified Opportunity Fund, opening the door for more investment in Qualified Opportunity Zone Property.
Any taxpayer that is organized as a U.S. corporation or partnership for federal tax purposes is eligible to be a QOF. The fund can self-certify by timely filing, including extensions, Form 8996 annually with the appropriate income tax return. The purpose of this form is to compute the ratio of qualified opportunity zone property to total assets in the fund. This computed ratio must equal or exceed 90% for the fund to continue to be a QOF.
The valuation of the assets for purposes of this test depends on if the entity has an applicable financial statement. If so, the value of the assets is the value that is reported in the applicable financial statement. If the entity does not have an applicable financial statement, the value of the assets is the original cost of the assets.
Qualified opportunity zone property is:
- Qualified opportunity zone stock,
- Qualified opportunity zone partnership interest, or
- Qualified opportunity zone business property
In order for a corporation or partnership to issue the qualified opportunity zone stock or partnership interests mentioned above, the issuing corporation or partnership must be a qualified opportunity zone business ("QOZB"). A QOZB is a trade or business in which substantially (70% or more) of the tangible property owned or leased by the business is qualified opportunity zone business property.
The following trades or businesses cannot qualify as QOZB:
- Private or commercial golf course
- Country club
- Massage parlor
- Hot tub facility
- Suntan facility
- Racetrack or other gambling facility
- Liquor stores
A completely new entity is not required to create a QOF. A pre-existing corporation or partnership may self-certify as a QOF, but the entity must satisfy all generally applicable Code and regulatory requirements, including the requirement that QOZ property must be acquired after December 31, 2017. The pre-existing entity can file Form 8996 and specify which month of their tax year they want to start being treated as a QOF. Any investments before that first month will not be eligible for deferral.
- Amy Koenig, CPA