What Is Form 8996: Qualified Opportunity Fund?

Form 8996, Qualified Opportunity Fund, is an IRS document used by a corporation or partnership for two purposes. The first is to self-certify that it is organized to operate as a Qualified Opportunity Fund (QOF), which is an entity designed to invest in designated low-income communities known as Qualified Opportunity Zones (QOZs).

The second purpose is for ongoing annual reporting. After its initial certification, the QOF must file Form 8996 each year with its federal tax return. This yearly filing demonstrates that the fund meets the investment requirements needed to maintain its tax status and is used to calculate any penalties for non-compliance.

Who Must File Form 8996

Any U.S. corporation or partnership that elects to operate as a Qualified Opportunity Fund must file Form 8996. The entity files the form for the first time in the tax year it becomes a QOF, indicating the specific month this occurred. After this initial self-certification, the form must be filed annually.

The responsibility to file Form 8996 rests with the QOF entity itself. Individual investors who contribute capital to a QOF do not file this form; their related tax reporting is done on other forms, such as Form 8949 and Form 8997.

Information and Calculations Needed to Complete the Form

To complete Form 8996, a fund must perform calculations centered on the 90% investment standard. This standard requires the fund to hold at least 90% of its assets in Qualified Opportunity Zone (QOZ) property. QOZ property includes QOZ stock, QOZ partnership interests, or QOZ business property directly owned or leased by the fund.

The 90% test is calculated on two dates during the tax year: the last day of the first six-month period and the final day of the tax year. The fund then averages the percentages of qualifying assets held on these two dates to determine if it met the 90% threshold. For example, if a fund holds 88% of its assets in QOZ property on June 30 and 94% on December 31, its average is 91%, satisfying the standard.

For valuation, assets are valued according to the fund’s applicable financial statement. If the fund does not have one, it must use the cost basis of its assets for the calculation. The fund will also need its Employer Identification Number (EIN) and the date it was organized.

Step-by-Step Guide to Completing Form 8996

Form 8996 is divided into several parts that guide the filer through certification, compliance, and penalty calculations.

• Part I is for the initial certification. In the first year, the QOF checks “yes” and specifies the month it was established; in all subsequent years, it checks “no.”
• Part II is for reporting the results of the 90% investment standard calculation, including asset values for the two testing dates and the resulting average.
• Part III is used to calculate the penalty if the average percentage from Part II falls below 90%.
• Part IV reports information about dispositions of QOF interests by the fund’s investors.
• Part V requires a detailed list of QOZ business property directly owned or leased by the fund.
• Part VI is for reporting the fund’s investments in QOZ stock or partnership interests.

Filing and Post-Filing Considerations

Form 8996 is not a standalone document and must be attached to the QOF’s annual federal income tax return. For a QOF structured as a corporation, it is attached to Form 1120, while a partnership QOF attaches it to Form 1065. The due date for filing Form 8996 coincides with the tax return deadline for the entity, including any extensions.

If the fund calculated a penalty for failing the 90% investment standard, that penalty amount must be paid with the tax return. Failure to include the form with the return can lead to non-compliance issues, even if the fund otherwise met all investment requirements.

After filing, a QOF must continue to file Form 8996 every year it wishes to retain its status. Maintaining meticulous records of asset valuations and testing date calculations throughout the year is important for seamless annual compliance.