Opportunity Zone Magazine Opportunity Zone Magazine Volume 1, Issue 1 | Page 9

GET IN THE ZONE: A PRIMER ON FORMING QUALIFIED OPPORTUNITY FUNDS
Newly enacted Section 1400Z-2 of the Internal Revenue
Code of 1986, as amended (the Code), enacted by the TCJA,
governs QOFs and permits self-certification as to “qualified”
status by filing Form 8996 with the entity’s tax return.
Careful completion of the
initial Form 8996 is essential
because capital gain invested
in an entity before its first
month as a QOF is not a valid
QOF investment.
its tax return to report whether it has met the investment
standard during its preceding tax year.
The TCJA requires that investors make an “investment”
in a QOF, which means that subscribers must acquire an
equity interest in a QOF in exchange for their respective
contribution of eligible gain (a loan or commitment to tender
capital in the future is not a valid investment). Moreover,
investors can receive the full suite of tax benefits under the
TCJA in connection with their interests even if their relative
portion of appreciation in the underlying QOF’s assets are
not proportionate to their capital invested. Likewise, in
connection with a QOF manager’s eligibility for QOF tax
benefits, although the proposed regulations do not address
carried interests specifically, it is unlikely that managers
would receive tax benefits without investing eligible gains.
INVESTMENT SELECTION
On Oct. 19, 2018, the Treasury issued proposed regulations
as additional guidance related to QOFs, and Form 8996. The
proposed regulations provide that an entity must specify the
month in which it will be first treated as a QOF in the Form
8996. Careful completion of the initial Form 8996 is essential
because capital gain invested in an entity before its first
month as a QOF is not a valid QOF investment. In addition,
QOFs must file a newly completed Form 8996 annually with
A QOF’s investment strategy and objectives should be in sync with
the TCJA’s intended purpose of stimulating positive growth within
designated communities and procuring the prescribed tax benefits
to its investors. A QOF’s operational strategies to maintain capital
and achieve income and growth, must incorporate the inextricably
linked investment restrictions requiring that at least 90 percent of
its assets are comprised of “qualified opportunity zone property”
(QOZP). A QOF’s remaining investments are not regulated.
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