Mid-Year Testing Is a Valuable Strategy for Opportunity Zone Businesses

While December 31 remains a key compliance milestone, businesses involved in Qualified Opportunity Funds (QOFs) and Qualified Opportunity Zone Businesses (QOZBs) should remember the upcoming June 30 test deadline, which is equally important for maintaining qualified status and avoiding penalties.

What should investors know about June 30 compliance?

QOFs are required to conduct semi-annual asset tests to verify that at least 90% of their assets are invested in qualified opportunity zone property. The June 30 test provides a midyear checkpoint to identify and address any compliance issues early. This proactive approach allows time to implement corrective actions and avoid surprises through the rest of the year. 

• Semi-annual asset testing. QOFs should conduct semi-annual tests to verify that at least 90% of their assets are qualified opportunity zone property. This testing should be completed to allow for proper planning and compliance to help avoid the risk of penalties. 
• Working capital safe harbor. QOZBs must have a written plan for the use of working capital within the 31-month safe harbor period. The plan should include a detailed schedule and demonstrate adherence to it. 
• Documentation and reporting. Maintaining accurate records and preparing for future filing of necessary forms, such as IRS Forms 8996 and 8997. Complete documentation will support the entity's compliance status and assist should the entity be audited. 
• Investment timing for tax deferrals. Accurate timing of investments is important to benefit from deferral opportunities. Investments in a QOF must be made within a 180-day statutory period. Reminding investors of these deadlines can help enhance available incentives and plan for tax liabilities. 
• Compliance with substantial improvement requirement. For QOFs investing in existing properties, it is important to follow the substantial improvement requirement, which mandates that the QOF must double the basis of the property during any 30-month period beginning after the date of acquisition. Keeping improvement projects on track and properly documented is essential. 
• Review of operating agreements and policies. Mid-year is a good time to revisit operating agreements and internal controls to align them with current regulations and best practices.

How CLA can help

By focusing on these key areas, QOFs and QOZBs can make sure they remain compliant and take full advantage of the tax benefits available to them. Mid-year testing is not just a regulatory requirement, but a strategic opportunity to improve financial outcomes and support long-term opportunity zone success. CLA’s real estate tax professionals are committed to helping you navigate regulatory requirements, enhance tax benefits, and achieve investment goals.