What Is Form 8996 and Who Must File It?

IRS Form 8996, Qualified Opportunity Fund, is used to certify that a corporation or partnership is organized as a Qualified Opportunity Fund (QOF) and to report on its investment activities annually. The form serves as the mechanism for the fund to demonstrate it meets the 90% investment standard mandated by the tax code, which is a compliance requirement for maintaining the fund’s special tax status.

Who Must File Form 8996

Filing Form 8996 is the responsibility of any U.S. corporation or partnership that elects to operate as a Qualified Opportunity Fund (QOF). A QOF is an investment vehicle created to invest in designated economically distressed communities known as Qualified Opportunity Zones (QOZs). An eligible entity makes its initial self-certification as a QOF by filing Form 8996 with its first applicable tax return.

This filing obligation rests solely with the fund entity itself, as individual investors who contribute capital to a QOF do not file Form 8996. Instead, investors use a separate form, Form 8997, to report their individual investments in QOFs and to track any related tax deferrals. The fund reports its overall compliance on Form 8996.

This filing requirement applies regardless of the fund’s management structure, including professionally managed funds and those self-directed by individuals. Every entity that holds itself out as a QOF must file the form annually to maintain its status with the IRS. Failure to file this form can jeopardize the fund’s certification and the tax benefits afforded to its investors.

Information Required to Complete Form 8996

The form requires the QOF’s legal name and Employer Identification Number (EIN), which must match the information on the fund’s corresponding income tax return. Filers must also know the date the entity was officially organized, as this is entered in Part I of the form.

The filer will need asset valuation data for two specific testing dates within the tax year: the last day of the first 6-month period of the tax year and the last day of the tax year. For each of these dates, the fund must determine the value of its total assets and the value of its assets that qualify as Qualified Opportunity Zone property. Assets can be valued using either the financial statement method or a cost basis method, according to rules in regulations section 1.1400Z2(d)-1.

This property falls into three categories: QOZ stock, QOZ partnership interests, and QOZ business property. QOZ stock or partnership interests represent equity the QOF holds in a domestic corporation or partnership that operates as a Qualified Opportunity Zone Business (QOZB). QOZ business property is tangible property the QOF or its subsidiary QOZB uses in a trade or business within a QOZ, provided the property was acquired after December 31, 2017. For any QOZ business property held directly, the fund must provide its location, identified by the 11-digit QOZ number found in IRS Notices 2018-48 and 2019-42.

Calculating the 90 Percent Investment Standard

Form 8996 details the calculation of the 90 percent investment standard using the asset values from the two testing dates. For each testing date, the fund calculates the percentage of its assets invested in QOZ property: the total value of the QOF’s QOZ property is divided by the total value of all assets held by the QOF. This calculation is performed for the mid-year testing date and again for the year-end testing date. The results of these two calculations are then added together and divided by two to arrive at the average percentage of assets held in QOZ property for the year.

If this final average is 90 percent or greater, the QOF has met the investment standard for the tax year. Should the average fall below 90 percent, the fund is subject to a penalty. The penalty is determined by first identifying the shortfall, which is the amount of investment needed to reach the 90 percent threshold. This shortfall is then multiplied by the underpayment interest rate, which fluctuates quarterly, to calculate the total penalty due for the year.

Filing Procedures for Form 8996

Form 8996 must be filed as an attachment to the QOF’s main federal income tax return. A QOF organized as a partnership will attach Form 8996 to its Form 1065, U.S. Return of Partnership Income. A QOF structured as a corporation will attach it to its Form 1120, U.S. Corporation Income Tax Return, or Form 1120-S for S corporations.

The filing deadline for Form 8996 is the same as the due date for the associated tax return, including any extensions. For example, a calendar-year partnership must file its Form 1065 and the attached Form 8996 by March 15, or by September 15 if a six-month extension is obtained. Submission can be done electronically as part of a complete e-filing package or through traditional mail if submitting a paper return.

The form must be signed by an authorized representative of the fund to be considered valid. If the fund failed the 90 percent investment test and calculated a penalty, the payment should be submitted according to the instructions for the main tax return.