How To Fill Out IRS Form 8996 (For OZ Funds), With Ashley Tison

Taxpayers can defer taxes by reinvesting capital gains from an asset sale into a QOF. To do so, IRS Form 8996 must be filed by all taxpayers holding an opportunity fund investment. Guidance on how to fill out this form will eliminate inconsistencies prior to submission.

Ashley Tison is an Opportunity Zone consultant and attorney based in Charlotte, North Carolina. Along with Jimmy Atkinson, he is co-founder of OZ Pros, an Opportunity Zone advisory firm.

Click the play button above to listen to my conversation with Ashley.

Or, for the video recording, click here.

Episode Highlights

  • How a Qualified Opportunity Fund uses Form 8996 to inform the IRS of the QOF investments.
  • Key factors to consider with filling out OZ-related tax forms.
  • Unique calculations related to QOF tax forms and what information is necessary to disclose.
  • The differences between the tax forms related to QOF and their purpose and importance.
  • K-1 tax forms for ETFs and ETNs and how they are work.

Featured On This Episode

Video Recording

Industry Spotlight: OZ Pros

Founded by Jimmy Atkinson and Ashley Tison, OZ Pros is an Opportunity Zone advisory firm that offers a simple document generation tool for quick and easy QOF and QOZB formation. OZ Pros also offers a customized done-for-you package as well and can assist with PPMs, subscription agreements, pitch decks, pro formas, business plans, and capital raising.

Learn More About OZ Pros:

About The Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

Show Transcript

Jimmy: Welcome to The Opportunity Zones Podcast. I’m your host, Jimmy Atkinson joined once again today by Mr. Ashley Tison coming to us from Charlotte, North Carolina. Ashley, how are you doing?

Ashley: Fantastic, Jimmy, it is always a pleasure to be with you on your podcast. And now the video aspect of this, which is pretty cool. Love being on camera with you and seeing your pretty face there.

Jimmy: That’s right. Thank you, Ashley. Thanks for the kind words. That’s a good point to point out that this is a special video podcast. We’re going to be walking through Form 8996, and some of the requirements that qualified opportunity funds have when they file their taxes annually. So if you own your own Captive Qualified Opportunity Fund, or maybe you’re a fund manager at one of the larger qualified opportunity funds out there, and you’re looking for a little bit of help with filling out your Form 8996 with your annual tax filings, this is going to be a great episode for you. And I would encourage you, if you’re not watching the video version, maybe you’re listening to us on Apple Podcasts or Spotify or elsewhere, please do head to opportunitydb.com/podcast and you’ll be able to find the video version of today’s podcast episode. It’s gonna be helpful because Ashley Tison is going to do his best John Madden impersonation, and walk us through these forms on his screen, and he’ll be circling stuff, and boom right, Ashley?

So looking forward to this diving into Form 8996 today with you, Ashley. So before we proceed, actually, let me mention that if you are an investor in a Qualified Opportunity Fund, our previous episode focuses on Form 8997, which is what an investor needs to fill out alongside his or her Form 8949 when he or she files his or her annual taxes as an individual taxpayer in the United States. If you deferred capital gains into a Qualified Opportunity Fund, you’ll need to fill out that form. But today’s episodes gonna be focused on what the qualified opportunity funds fill out. So, Ashley, Form 8996, let me just bring it up on the screen here, show it to us, and walk us through it.

Ashley: Yeah, you think that they would have done that the other way around, right? Form 8996 would be the individuals, and then 8997 would be the fund because you presumably would be doing it in that order. But this is Form 8996, and this is where the magic happens for opportunity funds because this is effectively the single form that you have to file in order to self-certify with the IRS. And so you’re going to file this form with your timely filed tax return, which is going to be due, right, because almost every fund is going to be a partnership or a corporation. By very definition, it has to be. And so this is going to be due on March 15, or if you extend out with your timely filed tax return on the extension. And so make sure that you get this filed and filed timely because if you don’t, you’ve got to go down the road of either a private letter ruling or other relief from the IRS in order to get the benefit.

So up at the top, you’re gonna put your name. Once again, just like back in kindergarten, first grade, or the SAT, no credit for putting your name in, but you’re going to ultimately put up the name, and that’s gonna be the name of the fund, right? So the specific fund that is filing the 8996 and the EIN of that fund. You’re going to indicate what type of taxpayer you are, whether you’re a partnership or a corporation, and this by checking the box. Most of them are going to be partnerships at the fund level. It’s very rare that I see a corporation unless it’s a RE. And so more often than not, it’s probably going to be a partnership that’s filing it. Is the taxpayer organized for purpose of investing in qualified opportunity zone property? And you’re going to check yes because if you check no, you’re done, right?

Jimmy: No, you’re not a QOF. And…

Ashley: Exactly right.

Jimmy: Yeah, exactly.

Ashley: And game over, right? So do not pass go. Do not collect $200 If you don’t check yes. So is this the first period the taxpayer is a QOF? Most of the ones that, you know, we’ve dealt with were set up in 2021. And so you’re going to be filing yes on this, right? So you’re gonna check yes. If it wasn’t, you’re gonna check, no, and you’re gonna just go about your business, right?

Jimmy: And then in subsequent years, you’ll always check no?

Ashley: That’s exactly right. And this Form 8996 needs to be filed every year that the QOF is in existence and is trying to get the benefit of 1400Z. If you check, yes, you’re going to indicate what month you chose to start becoming a Qualified Opportunity Fund. So depending on when you put cash into the fund, you want to make sure that that’s your first month. So if you put money into your fund on December 31st of 2021, you’re going to want to check December here. If it was November, you’re going to want to make sure that it was November, or whenever it was. You want to make sure that you are a qualified fund when you deposited the money. Then this month will also have impact on what you’re going to do relative to the six months test. So if this is January through June, you’re going to have a first six months test, right? Because January to June, you’re going to have a six-month calculation prior to that December 31st second deadline. If you set up and put your money in between July, and December, you’re not going to have a second one.

So if this is, let’s say, September, the 23rd night of September. I’m glad I didn’t try to sing there. But you’re going to end up not having a first six-month test, and so you’ll see that in effect, you know when we get down here to part two. Did any investor dispose of in part or whole of their equity interest in the fund? So do you have any investors sell or get rid of their investment into it, right? And if no, once again, check no. If they did, you’re gonna want to check yes, and then that’s going to have impact because you’re going to attach a statement to this indicating who disposed of their interest. And that would include of, you know, in a non-inclusion event transfer. So if you transferred it to your spouse, or to your kids, or whatever, you’re going to end up indicating that and you’re going to end up filing that on that extra statement.

So getting down into part two. Once again, if you are between July, and December, you’re going to leave this section 7,8,9. You’re going to leave that blank. But if you formed between January and June, you’re going to complete this section. So what you’re going to do for part seven, enter the amount from part six, line two, for total property held by the taxpayer in the last day of the first six-month period. So you go down here too. We’re going to go and zoom in on this online on part six, right? So this is actually line two right here on part six, which is on effectively page four of the 8996, where you’re going to be indicating on here what you’ve invested into. So this line two, the six-month qualified opportunity zone property test, you’re going to add part five columns B and C, and part six, column C, right? So it’d be the total of this amount right here. And up here in part five, what you own directly in the Qualified Opportunity Fund. So I’m just gonna go ahead and dive into the second page on this because this is effectively where you’re doing your 90% test.

So if you own directly from the QOF, right, so going back up into our opportunity zone cheat sheet, if you’ve made an investment into the fund, and then you own property directly into the fund, that’s either opportunity zone business property, or you’ve made an investment outside of an opportunity zone into something that is not an opportunity zone deal, then you’re going to be completing that information in part five, okay? And so you’re going to enter the qualified opportunity zone tract number, right? So this is enter every qualified opportunity zone, where qualified opportunity zone business property is directly owned or leased by the property is located. So you’re going to go into opportunitydb.com/map, and you’re going to type in the address, and you’re going to pull up the census tract number on that specific piece. And we’ve got some videos about how to do that elsewhere on your site, Jimmy, and you’re going to pull that opportunity zone’s census tract number, and you’re going to enter that in right here. And it’s I don’t know how many digits it usually is. But it’s nine or 10. It’s actually usually a fairly significantly long number. And you’re going to put that right here, okay? It’s gonna be like 100509582, right, or whatever it is.

And then you’re going to indicate the owned property value, right? So if you bought property, this is going to be the cost basis of what you paid for that property. So if you bought a $1 lot, you’re going to put a $1 right there. If it’s leased property, because you’re directly leasing property from somebody that owns the property in an opportunity zone, that leased property value is actually going to be the net present value of all of the future payments of the lease. And that includes any extensions of the lease as long as it’s got a numeric value attached to it. So if you have a three-year lease with five, three-year options, and inside of those options, you say, okay, the lease is going to increase by 1% per year, then you would take all 20 years, well, I guess it’d be 18 years of that lease, and you’re going to net present value that down into an existing net present value.

We actually have a net present value calculator that we’ve put together at OZ Pros. And if you reach out to us, we can work out to get that to you. We’re working on getting it up on the website. I think we’re gonna make that a free download for people. So that, that way they can utilize that as one of their tools to fill this out and to complete this thing. So that’s your owned property value, or your leased property value, right, for this first six months test. And then and, you know, we could go ahead and do that, right, relative to the second part of this, which is going to be at the year-end, right? So year-end-wise, you’re going to do the same thing. You’re going to go through that same analysis. This is part five. This is, once again, if it’s owned directly by the Qualified Opportunity Fund.

Now, if you’re like most folks, you’ve actually invested through a QOZB, not just through directly from your QOF, because of the benefits that you get, the 70% test, the 31-month working capital safe harbor. So in that case, we’re going to do the same thing down here in part six. We’re going to go to the opportunity zone census tract number, once again that you’re going to pull up from opportunitydb.com/map. You’re going to put that census tract number right here. You’re going to put the EIN of the qualified opportunity’s zone business. Now, and if you were investing into a QOZB that’s run by somebody else, you’re going to want to make sure that you’ve got in your investment documentation an obligation for them to assist you with getting this information. Because you’re gonna have to break it down by census tract where they actually hold their individual properties. So if you’ve got a property in Texas, in a zone right, you’re going to indicate that census tract right here, and you’re going to indicate the EIN of the QOZB that owns it, and then the value for that property inside of that census tract broken down for that census tract.

If you have a property in Florida, that’s owned by the same QOZB or different QOZB, you’re going to put that same information down on this census tract. And you’re going to break it out per census tract in this form. And that’s kind of confusing for a lot of people, and this is why it’s important that if you’re investing into a qualified opportunity zone business that you get, and you know, a commitment from them that they’re going to help you complete this, particularly if they’re in multiple locations. So if they are in multiple locations, there’s actually on part seven, this is where part seven comes in. This is, basically, an extension of the form so you’ve got lots of room to be able to fill out, right, all of those different opportunity zone tracts that you’ve got property in. But that’s effectively what part seven is, is an extension of this form. So once again, you’re going to go, and you’re going to compute what the value of your investment was at the six-month period for that particular census tract number.

So if you invested into a qualified opportunity zone business that’s doing a deal in one census tract, it’s actually going to be fairly easy. You’re going to indicate this census tract right here. The EIN of the business. And then if you put $1 into it, you’re going to put a million dollars right here. So this number right here, that’s inside of this, this value of QOZ stock or partnership interest, is either going to be your cost basis, or it’s going to be as shown on an applicable financial statement. But you would need to have financial statements that would drive that if you’re going to put in a different number than what you placed into the deal at the outset.

Now, where this is going to get interesting is in 2026, when people are going to pay their taxes, because this value is going to have effect because you’re either going to pay taxes on the amount of your original gain, or the value of your QOF investment at the time. So this is where it’s going to come into where people are probably going to want to go into that, you know, that alternative valuation method and look at that to look at, okay, “Has my investment gone down? Because if the value of your investment has gone down, then you can utilize this in order to pay less taxes when you pay those in 2027.

Jimmy: I was gonna say, you don’t usually want the value of your investment to go down. But if on December 31, 2026, it has, that’s great news for tax purposes, at least?

Ashley: Exactly. Not great news, necessarily, if you’ve made a bad investment, but that was one of the things that the IRS did give us is that they, you know, they gave us a little bit of a mitigator on that relative to the perceived risk of investing into opportunity zones is that if the value goes down, you’re not going to have some phantom tax bill from the deferral that you made. Where this could get really kind of interesting too is for investments into things like solar, or other things that are significantly depreciating because the value of those things will have gone down between now and December of 2026. And so once again, you know, really flesh that out with your tax professional and with experts to do the analysis on the valuation and what you can do from a valuation on that.

So then, once again, just kind of similarly to the directly owned, that we’ve talked about up in the previous section, you’re going to indicate the owned property value and the lease property value for the QOZB as a whole. So this is not going to be the amount that you put in individually, this is going to be what it has as a whole for that particular census tract. So if you put in $1, and your buddy puts in $1, and you go out and you buy a $2 million piece of property, then you’re going to put in that $2 million piece of property right there in the owned property value. Now, if you then went out and got a bank loan on it, because you can do that, you can lever up between yourself and your buddy, and then a bank loan, and you bought a $4 million piece of property, you’re going to put a $4 million number right here, in this six-month value column.

The same analysis goes relative to the leased property value, so you’re going to complete inside of this leased property value piece right here, the net present value of the lease that you have. And once again, you’re going to take all of the lease payments that you’ve got set out in that lease, and then you’re going to put them into a calculator, and you’re going to discount them, and you’re going to bring it down to a net present value number for that lease. Now, this number is not going to change. Once you have that initial amount, you don’t then have to go out and recalculate it every time for bleed off on that lease. That number is going to stay static. So this actually presents a place where people can actually get a fairly significant number that goes into their good assets store because if they’re able to get a lease with enough term on it, that number becomes pretty significant and it stays static inside of this form.

So you’re going to place that for the first six months, and then you’re going to do the same exercise for the end of the year. And like I said before if you’ve formed your fund between July and put your money in between July and December, you’re not going to do this side, right? You’re going to leave this side blank. And you’re just going to focus on the end-of-year value of your qualified opportunity zone partnership interest, and also the owned property value and the leased property value. And so what you’re going to do is, you’re going to put these numbers, so your investment value for both of these columns. So the C, you’re going to total that up. So if you had $1 in one census tract, and then you had $1 in another census tract, you’re going to total that up to $2 million down here.

And you’re going to do the same thing at the end of the year, right? So you’re going to basically complete this out for the end of the year as well, okay? And this is going to then drive where you put this into relative to the form on the front page because you’re going to go and ultimately total these up, right. So you’re gonna have the six-month test where you’re adding part five columns B and C, that’s any of the direct owned, and part six, column C, right? So you would put this number, so this part C is where you would put the $2 million down here. And then for the year-end test, you’re going to add part five. You’re going to once again add that stuff that’s directly owned by the QOF that’s up here. And then you’re going to combine it down with this amount right here. So you would put the $2 million right here, okay?

And so then you’re going to also indicate down here with this checkbox, type of accounting method used to value property listed on this form. If you have applicable financial statements, you’re going to check this box. And this is at the fund level. This is not at the QOZB level, right? So you’re filling this out for the form. So you’re determining whether this is happening at the fund level instead of at the QOZB level, or whether you use the alternative valuation method, which is, basically, your cost basis. And I would say that most people are probably going to use that cost basis because they’re not going through the rigmarole of compiling financial statements. So you’re going to take this number, right, that’s there, and then you’re going to pull that back into this previous page, and you’re going to fill that in right here. So you’re going to put in… So in this case, we had $2 million, so we’re going to put in $2 million here.

And then we’re going to have the total assets that were deposited into the fund. So this is, basically, the total amount. So if you had $2 million here, and you had, basically, taken 10% and put it somewhere else, or you’re retaining that inside of the fund, you could theoretically have $2.2 million here. And then you’re going to divide line seven by line eight, and you’re going to want this number to be north of 90%. So this number needs to be north of 90%, or closer to the 100%. So in this case, it would be 90, or I guess if you divide that out, maybe it’s a little bit more than 90% or whatever, but you’d have 90% here. So then you’re going to pull, once again from the end of the year, for lines 10,11, and 12. And once again, right, this goes into if you invested between July and December, you’re going to leave this column blank right here because you don’t have a first six-month test. But if you were January to June, you’re going to have your numbers here, here, and here, and then you’re going to do the same thing for the end of the year.

So once again, we got 2 million bucks, and we put it in $2.2 million. So we had 90% here, then what you would do is you add lines nine and 12, that would be 180, in this case, and then you divide by 2, which gets us to our 90%. Is line 14 equal to or more than 90%? Yes, it is. And then you don’t have any penalty calculations. If it’s not, so if it’s below 90%, then you’re going to check no, and the fund has failed to maintain the investment standard. Complete part four to figure out the penalty. And so part four is going to be on page two. And I’m not going to go into the details of this, Jimmy, about computing this because everybody that we know is going to hit that 90% standard. But if you don’t, you would complete out this part four, and you would show what the total assets were on the last day of the month, right? So you’re going to compute this month over month. So it’s going to be based upon how much you missed it month over month. So…

Jimmy: I have to say, you don’t want to miss it, because then you have to fill out part four.

Ashley: Exactly right.

Jimmy: Which might be a bigger penalty than the actual penalty.

Ashley: Yeah. I love filling out tax forms, Jimmy, just like I’m sure everybody else listening to this does. But, you’re gonna list the total assets on the last day of that month, and then you’re going to have a 90% threshold on that. The total qualified opportunity zone property held on the last day of the month, then you’re going to subtract that number from the 90% in order to figure out how much under the 90% you were. And then you’re going to multiply it by the underpayment rate. The underpayment rate has actually gone way down for this year, I guess, based upon COVID, and the interest rate environment, and that kind of thing. So it’s actually not a really, really hardcore number.

But it is, I mean, you’re computing this on a month over month basis, so if you miss it for 12 months, it could be significant. If you miss it by a month, like once again, right, it’s actually probably not going to ultimately end up being a huge killer deal for you relative to this penalty. But you’re going to multiply how much you were under by the underpayment rate to come up with that right here. And then you’re going to divide that by 12, round up to two decimal places, and you’re going to put that number in here. And then you’re ultimately gonna end up totaling that up, so add columns A through F of line seven. So you’re effectively going to end up compiling that up, right, and totaling it up for what you were relative to the penalty, okay?

Actually, that’s not A through F, that’s A through L, right, because you’re going to complete all of the months. You’re, basically, going to add up all 12 months. Because what they’re doing is is that they’re saying, “Okay, you got a monthly amount that’s your penalty. And you’re going to calculate that up for the aggregate year.” So once again, if you miss it for the whole year, it could be significant. You know, if you miss it for a month, it may not be. But Jimmy, that’s what you do on Form 8996. And hopefully, that was helpful for everybody. Hopefully, we didn’t get too into the woods on that and or into the weeds. I guess it was the woods as well. But…

Jimmy: Yeah, the weeds of the woods., right?

Ashley: Exactly. The weeds or the woods. We’re here to help people navigate the weeds of the woods.

Jimmy: Tell our listeners where they can go to learn more about you and OZ Pros, if they want to set a strategy call with you, or if they want additional assistance on Form 8996. I know you can plug them in with some reputable accounting firms.

Ashley: Absolutely. So ozpros.com, and on ozpros.com you can either set a strategy call with myself or my team. Or we also have the OZworks Group, which is a…think of it as a virtual co-working space for all things opportunity zone. And it’s a curated virtual co-working space, where when you join, you get an intake interview, and they specifically ask, what are your needs? What can we help you with? And then they plug you in with people inside of the group that might be able to assist you with that stuff. So we’ve got professionals, we’ve got accountants, we’ve got fund managers, we’ve got investors, we’ve got all kinds of folks inside of the OZworks Group. And inside of the OZworks Group, we actually have the OZ Pros insider access, and that’s a weekly call with myself and my team. And we go through every question that you might have about opportunity zones. So we unpack those, and it becomes a weekly opportunity to check-in or get information. And we’ve also got the videos of that, and the individual questions that happen that people are posting regularly that we’re answering inside of that, you know, group inside of Ozworks Group. So reach out to…go to either ozpros.com, or ozworksgroup.com, or send us an email, drop us a line, and we’d be happy to answer your questions, and help you navigate the weeds in the woods of opportunity zones.

Jimmy: Fantastic. Thanks, Ashley. This has been a little rundown of how to fill out Form 8996 if you are a Qualified Opportunity Fund. Again, if you’re just an investor in a Qualified Opportunity Fund, if you just wrote a check to some fund you want to defer your capital gains in the last year, or maybe you’re doing it sometime this year, you don’t need to worry about Form 8996 unless you’re also the fund manager, that form would be Form 8997. That’s the previous episode in this series of podcasts on The Opportunity Zone Podcast. As always, I will have show notes for today’s episode available at opportunitydb.com/podcast. There you can find links to all of the resources that Ashley and I discussed on today’s episode, a link to ozpros.com, of course, where you can find out more about OZ Pros and the advisory service that Ashley Tison provides. I’ll link to OZworks Group at ozworksgroup.com. That’s that community of like-minded opportunity zone participants and stakeholders. And we’ll also link to Form 8996, of course, as well. So, Ashley, thanks for joining me today. It’s been a pleasure.

Ashley: As always, Jimmy, thanks for having me on the show. It is always a pleasure being with you.

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