Will my QOF be subject to penalties? Is there a way to move the funds elsewhere?
Yes, the QOF will be subject to penalties, though they might be avoidable. You can remove money from the QOZB and invest in a different qualifying entity, but go through the instructions on Form 8996 and the penalty calculation to see whether you can avoid penalties by doing that.
Can you cure the business's failure to qualify as a QOZB within six months of the failure? If so, the OZ regulations would allow you to treat the QOF's interest in the business as a good QOZB interest on the testing date (but this is a one-time "Mulligan"; your QOF can't get this relief if it's used it before). Alternatively, you could sell the business but you'd have to reinvest the proceeds in a good QOZB by the end of the year (because the 12-month rule that treats reinvested sales proceeds as a good asset applies only if the asset sold is qualified opportunity zone property). Does your QOF have other assets? If so, keep in mind that the 90% test is an average of the two testing dates during the year, so that if the business accounts for less than 20% of the QOF's assets, you might not fail the 90% test (assuming that the other assets are good QOZP and the business was a QOZB at the six month testing date).
Yes, penalties will be due for each month that you do not meet the 90% QOZBP requirement at the fund level. Absolutely, you can and should reallocate the funds to other QOZBP necessary to meet the test. There is no rule that requires you to keep funds in an lower tier QOZB, especially if it does not qualify as such.
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