If you don't do it by year-end, you are out of compliance, so you can either unwind the QOF or pay the penalty. If you don't get your QOF invested into qualified assets soon after the Dec. 31 deadline, you risk decertification.
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What happens if I formed my QOF prior to June 30 but haven’t invested at least 90% into a QOZBP?
What are my options if I don’t do it by year-end?
Answers
The formation date is not material. Rather, it is the date you have the gain - that is when the 180 day investment window. Also, the window often opens on December 31, even if the sale producing the gain occurred earlier in the year.
You can opt to not make the election to be a QOF so that no penalty applies but then would not get a deferral. I know of several funds that would allow a sidecar investment in their QOZB.
The second set of proposed regulations allowed a six-month window to "ignore" cash contributions before including in testing. In your example, the cash was contributed more than six months before Dec. 31. As such, funds not invested into a business property (QOZBP) or into a lower-tier subsidiary (QOZB) would be subject to penalty unless you are able to prove reasonable cause.
It depends. If the seller is a partnership or an S corp entity, then you are still good.
QOFs are liable for an underinvestment penalty, which is currently 0.5% per month of the amount qualifying investment falls below the 90% threshold, if the average proportion of qualifying investment at the twice-annual testing periods fall below 90%. Because QOFs are permitted to exclude recently contributed investments (those received within 6 months of a testing date that are held in cash/cash equivalents) from testing, you likely won't face many penalties this year. If your fund was formed in early June 2019, for example, then your first testing period will be on Nov. 31, 2019. You can exclude initial capital contributions from testing from the date they were contributed until Nov. 31, 2019, in which case no penalty would be due for underinvestment during that period. That just leaves December -- and you'd pay the penalty noted above for any underinvestment below that 90% threshold. Your next testing date after Dec. 31, 2019 will be June 30, 2020, which gives you quite a bit more time to get to that 90% threshold and avoid any future penalties.
You need to perform the compliance test for June and December, assuming your fund is a calendar year. If, after taking into consideration the safe harbors provided by regulations, it still does not meet the 90% test, you will be subject to penalties.
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