More Changes May Be In Store For Opportunity Zones

By Mary Burke Baker, Government Affairs Counselor, K&L Gates LLP, Washington DC

The Census Bureau may make a liar out of all of us who have been saying that the Opportunity Zone designations are set in stone and won’t be changed short of a statutory revision to the OZ rules. Treasury officials are considering using the revised census tracts for the 2020 census to see if they can squeeze out a few more eligible Opportunity Zones. The revisions may result in some census tracts that originally didn’t meet the income requirements to now qualify to be designated as an OZ. On the flip side, there may be some tracts that did qualify but now won’t. Presumably Treasury would grandfather these zones and allow additional designations to be made. For example, if a state has four additional qualifying census tracts, the state would be able to nominate one (25%) of those tracts to be an OZ. Stay tuned!

A few developments and items of interest in OZ land…

The IRS has released draft Form 8997, “Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments.” Click here for the PDF. Investors in QOFs will be required to file this form with their timely filed (including extensions) annual tax returns, including individuals, C corporations, RICs, REITs, partnerships, S corporations, trusts and estates. The form operates somewhat like a balance sheet, requiring investors to list their QOF holdings as of the beginning of the year and the end of the year, and also reporting new QOF investments and dispositions of OZ investments during the year. It will help the IRS enforce OZ by giving the agency a roadmap to be able to track and follow up on capital gains deferred to make sure that they are eventually taxed (in 2026 or earlier) and don’t disappear into the ether. If QOFs are eventually required to report to the IRS the investments that they are receiving, the IRS could cross match that information to the investor’s Form 8997 as an additional compliance mechanism. Presumably the Form 8997 will be in addition to the investor information filed on Form 8949, which lists the capital gains of the investor during the year and identifies which of the gains were invested into a QOF. The IRS will probably still want the Form 8949 information to cross match information being reported to the IRS from brokers or other sources. The effect is to create a web of information so that capital gains invested in QOFs do not slip through the cracks and become part of the annual $450 billion tax gap, the difference between the taxes legally owed and the taxes timely paid. The Form 8997 will also help investors and their tax preparers keep track of what is what from year to year.

We still are anticipating the adaptation of Form 8996 filed by QOFs that will require the QOF to report details about fund investments, e.g., the amount of tangible property acquired.

The Federal government has launched its own Opportunity Zone website, The website provides across-the-government information about the OZ incentive, including links to the statute and regs, links to governmental programs and resources that can be used to facilitate OZ investments, examples of OZ investments, a photo gallery of OZ projects, and much more information. The website is intended to inform, educate and empower investors, developers, entrepreneurs, communities, economic development agencies and other stakeholders to encourage OZ investments.

We continue to hear that Treasury is aiming for final OZ regulations by the end of this year. I wouldn’t place any big bets on that timeline, but it’s possible, particularly if Treasury decides to reserve out certain issues to finish later. This sometimes occurs when there is a push to release regs but certain issues – often the most tricky ones – are not yet resolved.

Source: City of Pasco