On October 31, 2019, the IRS and Treasury released draft Form 8996, Qualified Opportunity Fund which requires qualified opportunity funds (QOFs) to report specific information on the value and location of their investments.

The draft Form 8996 was developed from the current Form 8996, with an additional question added to Part I: General Information and Certification, and additional reporting requirements in Part V: Qualified Opportunity Zone Business Property and Part VI and Part VII: Qualified Opportunity Zone Stock or Partnership Interests. Corporations or partnerships that are organized and operated as a QOF must file Form 8996 annually with their tax returns.

Definition of QOZs and QOFs

The Tax Cuts and Jobs Act (TCJA) created qualified opportunity zones by adding IRC Section 1400Z-1 and IRC Section 1400Z-2 to encourage investment in economically-distressed areas by giving tax incentives to taxpayers who invest and hold on to investments in qualified opportunity zones through QOFs. (See Tax Alert 2019-1534 for EY's latest information on opportunity zones.)

IRC Section 1400Z-1 allows certain economically-distressed areas to be designated as qualified opportunity zones.

IRC Section 1400Z-2 provides benefits for investment in QOFs. A QOF is a corporation or partnership that holds at least 90% of its assets in qualified opportunity zone property. Investors in QOFs must make an IRC Section 1400Z-2(a) election to defer eligible gain. The investment interest must be an equity interest and may include preferred stock or a partnership interest with allocations. In general, the investment must have been made within 180 days after the deferred gain was realized.

Investors can generally defer tax on eligible gains invested in a QOF until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for longer than five years by the end of the deferral period, 10% of the deferred gain is excluded; a 15% exclusion applies if the investment is held for more than seven years by the end of the deferral period. If the investment is held for at least 10 years, the investor is eligible for a basis increase equal to the QOF investment's fair market value on the date that the QOF investment is sold or exchanged, thus excluding 100% of the gain that would have been realized from disposing of the appreciated QOF.

What must be reported

The draft Form 8996 includes new reporting requirements for QOZ business properties (including QOZ stock and partnership interests), in addition to the reporting requirements under the current Form 8996, which requires general information and certification, investment calculation, and the QOF average and penalty calculation. The draft Form 8996 also now requires QOFs to report on any disposal of an equity interest in the QOF.

For QOZ business property directly owned or leased by the QOF, the draft Form 8996 requires QOFs to report:

• Every census tract where QOZ business property directly owned or leased by the taxpayer is located
• The value of QOZ business property held directly at the end of the first half and the last half of the tax year

For QOFs with QOZ stock or partnership interests, the draft Form 8996 requires QOFs to report:

• Every census tract in which the tangible property of the QOZ business is located
• The EIN of the QOZ business
• The value of the QOZ ownership interest held at the end of the first half and the last half of the tax year, apportioned to each census tract
• The value of the tangible property held by the QOZ business at the end of the first half and the last half of the tax year (owned and leased property)

For the disposal of equity interests in the QOF, the draft Form 8996 requires QOFs to attach a statement reporting:

• Each investor's name
• The date each investor disposed of all or part of its QOF equity interest
• The interest that each investor transferred during the QOF's tax year

Implications

Draft Form 8996's new tax reporting requirements for corporations and partnerships organized and operated as a QOF provide guidance on what additional information the IRS expects taxpayers to retain to comply with the IRC Section 1400Z-2(d) 90% QOZ property investment requirement.

Taxpayers should consult with their tax advisors and preparers regarding compliance with the reporting requirements. We expect that the IRS will continue providing guidance on Opportunity Zones, which will likely include finalizing a version of draft Form 8996, as well as providing additional reporting requirements for QOF investors and/or QOFs.

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