Tax Filing for Opportunity Zones
As the tax filing deadline approaches, Opportunity Fund sponsors, accountants and lawyers are working through the IRS forms for the first time. Here is what you need to know.
The sponsor entity, whether it is a corporation or partnership or LLC must file IRS Form 8996 to become an Opportunity Fund. Pay attention to the Instructions for Form 8996. The key is to recognize that the Form 8996 election is effective as of the specific month that the entity identifies on Line 4 of Form 8996.
Form 8996 must be filed no later than the due date for the tax return of the electing entity.
The month that an entity elects to become an Opportunity Fund is critical. A Fund is subject to penalties if it does not timely deploy its assets into a Qualified Opportunity Zone Business or a Qualified Opportunity Zone Business Property.
The effective month entered on Form 8996 is of primary importance to the investor and how they intend to defer tax on their gains. Investors are only entitled to defer tax on gains invested in an entity if the entity is in fact an Opportunity Fund on the date the gains are invested.
Once again… Investors are only entitled to defer tax on gains invested in an entity if the entity is in fact an Opportunity Fund on the date the gains are invested.
This is of primary importance for investors. If an entity accepts investor money on a date that precedes the effective month that the entity enters on line 4 of Form 8996, then the investor failed to make an Opportunity Fund investment.
Be careful and coordinate with the sponsor when completing Form 8996. The month entered on Line 4 of Form 8996 must be prior to or the same as the date on all investor checks and subscription documents and must be after or the same as the formation date of the Opportunity Fund entity.