What does it mean for the QOF if the QOZB can’t fulfill these requirements?
The interests in the QOZB EW not qualified property, so the QOF likely will not satisfy the 90% qualified property requirement. Penalties apply (basically interest in the deferred tax resulting from the QOF investment). There can be bigger problems if the QOZB continues to not qualify over the long term.
Depends how/why you fail. There may be an interest charge or you may be knocked out of the program.
The QOF is non-compliant by extension, which will probably result in the assessment of penalties at the QOF level. The IRS hasn't yet released parameters for decertification of QOFs, but that might be on the table if the QOZB is far enough out of compliance.
All of the assets would be disqualified assets and the QOF is subject to monthly penalties until the QOF meets the 90% qualified asset test.
If an entity fails to meet the tests as a QOZB, it may put on jeopardy the QOF 90% test. It is important that the issue is promptly addressed and corrective action taken. The fund must perform tests every six months. If it fails to comply, penalties will be imposed.
If an entity fails the Qualified Opportunity Zone business tests, it is subject to the 90% of assets test. If the 90% of assets test fails, then a penalty is calculated. There is a monthly penalty. The penalty under IRC section 6621(a) (2) is 3% plus the fed short-term rate. Currently, the rate is 5% a year. 90% of assets less qualified assets times the 6621 rate. Here is a 90% test penalty example: total assets $50,000,000, 90% of assets are $45,000,000, total qualified assets $40,000,000, there is a $5,000,000 shortfall. The monthly penalty is $20,833.33, $5,000,000 X (5% /12). If there is a penalty, the shortfall will be recalculated each month.
While the penalty assessed for failure to meet the 90% test at the QOF level is based on the amount by which they "miss" the test, the QOZB requirements are a cliff test. This means that if the QOZB meets the tests by any amount, the entire investment is non-qualified for purposes of the funds 90% investment standard and will be subject to penalty on the entire QOZB investment.
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