The Importance of Year-End Testing for QOF and QOZ Businesses

As we approach the end of the year, it's crucial for businesses involved in Qualified Opportunity Funds (QOFs) and Qualified Opportunity Zone Businesses (QOZBs) to focus on year-end planning and compliance. Proper planning and testing can help keep these entities in compliance with regulatory requirements and enhance available tax benefits.

Year-end testing is essential for QOFs and QOZBs to support their qualified status and avoid significant penalties. Compliance with statutory requirements, such as asset testing and adherence to the working capital safe harbor provisions, is critical.

Proper planning can help these entities meet deadlines and maintain their qualified status, which offers significant tax incentives such as deferring capital gains and potentially eliminating taxes on appreciated property after holding for ten years.

Key considerations for year-end planning

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 by December 31st to allow for proper planning and to maintain compliance, avoiding the risk of penalties.

Working capital safe harbor

QOZBs must have a written plan that outlines the intended use of working capital funds within a 31-month period. This plan should include a detailed schedule of how the funds will be spent. Adherence to this plan is necessary to maintain compliance and to avoid penalties.

Documentation and reporting

Maintaining correct records and timely filing of necessary forms, such as IRS Forms 8996 and 8997, is essential to comply with reporting requirements and substantiate tax positions. Complete documentation will support the entity's compliance status and could help in case of audits.

Investment timing for tax deferrals

Accurate timing of investments is important to benefit from deferral opportunities. Investments in a QOF must be made within 180 days of realizing the gain. Informing investors of these deadlines can help increase 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 within 30 months. Confirming that improvement projects are on track and properly documented is essential.

Review of operating agreements and policies

Regularly review and update operating agreements and internal policies to align them with current regulations and best practices. This helps maintain compliance and prepare for any regulatory changes.

How CLA can help with QOFs and QOZBs

By focusing on these key areas, QOFs and QOZBs can remain compliant and take advantage of the tax benefits available to them. Year-end 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 professionals are dedicated to helping you navigate regulatory requirements, enhance tax benefits, and achieve investment goals. Contact us today to see how we can support your year-end planning and help your QOFs and QOZBs remain compliant and successful.