The IRS says that 90 percent of my capital has to be deployed in an Opportunity Zone, while 70 percent of the business interest and 50 percent of the revenue need to remain in an Opportunity Zone.

Answers

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  Peter McNeil

  Comprehensive Financial Solutions and Tax

  March 26, 2019

  If the 90 percent test fails the penalty under IRC section 6621(a) (2) 3 percent plus fed short-term rate. Currently the rate is 5 percent a year. 90 percent of assets less qualified assets times the 6621 rate. Here is a 90% test penalty example. Total Assets: $50 million. 90 percent of assets are $45 million. Total qualified assets $40 million. There is a $5 million shortfall. The monthly penalty is $20,833.33, $5,000,000 X (5 percent/12). If there is a penalty, the shortfall will be recalculated each month. If the fund invests in a separate business, then we can replace 90 percent with 63 percent for assets inside the business. We still need the second set of regulations from the treasury department to come up with firm penalty calculations for failing the 50 percent of revenue rule.

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  Kostas Poulakidas

  Taft Stettinius & Hollister

  March 26, 2019

  Not complying with the various Opportunity Zone fund and Opportunity Zone business requirements can jeopardize qualifying as an OZ investment. OZ funds, OZ businesses and OZ investors need to ensure compliance requirements are being fulfilled as well as determine (and disclose in offering documents) who is responsible for maintaining compliance with the various OZ requirements.

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  Phil Jelsma

  Crosbie Gliner Schiffman Southard & Swanson (CGS3)

  March 25, 2019

  You pay a penalty based on what you should have had in the OZ and what you in fact did have the OZ. There is no cure period, but the penalty is based on the tax underpayment rate.

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  Valerie Grunduski

  Plante & Moran, PLLC

  April 03, 2019

  One thing that has not yet been made clear is what causes a QOF to lose certification. For purposes of the 90% test, Form 8996 must be completed annually and will result in assessment of a penalty on any amounts by which you fail to meet the threshold. For investments in qualified Opportunity Zone businesses, which is where the 70% and 50% tests are calculated, you could run the risk that your entire QOZ business investment being deemed non-qualifying for purposes of the Form 8996 90% penalty assessment.

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  Elizabeth Humphreys

  Zephyr OZ GP LLC

  March 27, 2019

  If a Qualified Opportunity Fund fails to meet the 90 percent asset test, then the fund must pay a penalty for each month that this test is not met. This is laid out clearly in s1400z. However, no such penalty or discussion of a failure to meet a test exists for the 70 percent tangible asset test for a business to qualify as a qualified opportunity business. Therefore, there is a likelihood that these businesses would not qualify which would have a roll-on effect on the 90 percent asset test of the fund that had invested in that business.

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