Opportunity zones: Tax reporting reminder
Strategic planning for a new year can sometimes distract us from tax return filing deadlines until they are right around the corner. For taxpayers who became involved with one or more Qualified Opportunity Funds (QOFs) in 2019 (whether as an investor or on behalf of the fund itself), a time crunch is best avoided in light of new filing obligations that will need to be submitted with annual returns. Here is a summary of the three filings relevant to QOFs.
(Note that this information is intended only as a high-level summary of the reporting obligations applicable to QOF investors and QOFs. These taxpayers should consult with their tax advisers and preparers regarding compliance with the reporting requirements related to their QOF investments.)
1. Form 89961 - Qualified Opportunity Fund
Who must file: Corporations or partnerships that are organized and operated as a QOF.
Timing: Form 8996 must be filed annually with the QOF’s timely filed 2019 federal tax return (e.g., 1120 or 1065), including extensions.
What is reported: A corporation or partnership must use Form 8996 to certify that it is organized to invest in qualified opportunity zone (QOZ) property. In addition, a corporation or partnership must file Form 8996 annually to report that the QOF meets the investment standard of section 1400Z-2 or to figure the penalty if it fails to meet the investment standard.
- The Form 8996 election is effective as of the month that the QOF identifies on Line 4 of Form 8996.
- The date on Line 4 must be a date that is on or after the date of formation of the filing corporation or partnership but prior to the date on all investor checks and subscription agreements. Investors are only entitled to defer tax on gains invested if the entity was in fact a QOF on the date the gains were invested. If an entity accepts investor money on a date that precedes the effective month entered on line 4, the investor failed to make QOF investment.
Note: As of January 2020, the IRS released a new Form 8996 that adds more detailed reporting requirements for QOFs. Newly-added Part V is for QOZ business property that the QOF directly owned or leased, and newly-added Part VI is for investments in QOZ stock or partnership interests with values apportioned to census tracts based on where the tangible property of the QOZ business is located.
2. Form 89492 - Sales and other dispositions of capital assets
Who must file: Eligible taxpayers (e.g., individuals, C corporations, partnerships, S corporations and trusts) holding a QOF investment at any point during the 2019 tax year must file Form 8949.
Timing: Form 8949 must be filed with the timely filed 2019 federal tax return, including extensions.
What is reported: Taxpayers must use Form 8949 to report the election to defer capital gain invested in a QOF investment. Depending on whether the gain being deferred is short- or long-term, it will be reported on its own row of Form 8949 either in Part I with box C checked (short-term) or Part II with box F checked (long-term). If a taxpayer has made multiple investments in different QOFs or in the same QOF on different dates, a separate row must be used for each investment.
Note: Investors must submit Form 8949 as well as Form 8997 with their annual 2019 tax return.
3. Form 89973 - Initial and annual statement of QOF investments
Who must file: Eligible taxpayers (e.g., individuals, C corporations, partnerships, S corporations, and trusts) holding a QOF investment at any point during the 2019 tax year must file Form 8997.
Timing: Form 8997 must be filed with the timely filed 2019 federal tax return (including extensions).
What is reported: Form 8997 contains four parts:
- Part I: report QOF investments held at the beginning of the 2019 year
- Part II: report capital gains for the 2019 tax year that were deferred by investing in a QOF
- Part III: report QOF investments disposed of during the 2019 tax year
- Part IV: report QOF investments held at the end of the 2019 tax year due to current year capital gain deferrals and prior tax year(s) deferrals