8996 Instructions for Form 8996

Instructions for Form 8996

Department of the Treasury
Internal Revenue Service

(Rev. December 2018)
Qualified Opportunity Fund
Section references are to the Internal Revenue
Code unless otherwise noted.

General Instructions
Future Developments

For the latest information about
developments related to Form 8996 and
its instructions, such as legislation
enacted after this form and instructions
were published, go to IRS.gov/
Form8996.

Purpose of Form

The Tax Cuts and Jobs Act (TCJA),
section 13823, added section 1400Z-1
to provide for the designation of certain
low-income communities as qualified
opportunity zones and added section
1400Z-2 to provide certain benefits for
investments in these qualified
opportunity zones through investment in
qualified opportunity funds (QOFs).
Taxpayers that invest in qualified
opportunity zone property through a
QOF can defer the recognition of certain
gains. See Definitions below.
A corporation or partnership uses
Form 8996 to certify that it is organized
to invest in qualified opportunity zone
property. In addition, a corporation or
partnership files Form 8996 annually to
report that the QOF meets the
investment standard of section 1400Z-2
or to figure the penalty if it fails to meet
the investment standard. See
Definitions next. See also the
Opportunity Zones Frequently Asked
Questions page on IRS.gov for more
information and guidance.

Definitions
Qualified opportunity zone. For a
complete list of qualified opportunity
zones, see Notice 2018-48, available at
IRS.gov/IRB/
2018-28_IRB#NOT-2018-48.
Qualified opportunity fund (QOF). A
QOF is an investment vehicle organized
as a corporation or a partnership for the
purpose of investing in qualified
opportunity zone property (other than
another QOF). Only a corporation or a
partnership organized in one of the 50
states, the District of Columbia, or a
U.S. possession is eligible to be a QOF.
A QOF must hold at least 90% of its
Jan 22, 2019

assets in qualified opportunity zone
property.
The 90% investment standard is
determined by the average of the
percentage of qualified opportunity zone
property held in the QOF as measured
on:
1. The last day of the first 6-month
period of the tax year of the QOF, and
2. The last day of the tax year of the
QOF.
See the instructions for Part I if this is
the first year the corporation or
partnership self-certifies as a QOF and
the corporation or partnership selects a
month other than the first month of the
tax year as the first month in which it
chooses to be a QOF.
If you fail to satisfy this 90%
investment standard, you may have to
pay a penalty for each month the QOF
does not satisfy the investment
standard. See Part II and Part III of
these instructions for more details.
If a corporation or partnership is
organized in a U.S. possession,
CAUTION it may be a QOF only if it is
organized for the purpose of investing in
qualified opportunity zone property that
relates to a trade or business operated
in the U.S. possession in which the
corporation or partnership is organized.

!

Qualified opportunity zone property.
Qualified opportunity zone property
includes qualified opportunity zone
stock, a qualified opportunity zone
partnership interest, and qualified
opportunity zone business property.
Qualified opportunity zone stock
is any stock of a domestic corporation
that a QOF acquires after 2017 from the
corporation, either directly or through an
underwriter, solely in exchange for cash.
The corporation must be a qualified
opportunity zone business, defined
later, when the stock is purchased. The
corporation must be organized for the
purpose of being a qualified opportunity
zone business. The corporation must
qualify as a qualified opportunity zone
business for substantially all of the time
the QOF holds the stock.
A corporation organized in a U.S.
possession is a domestic corporation
for this purpose only if the corporation
Cat. No. 71709K

conducts a qualified opportunity zone
business in the U.S. possession in
which the corporation is organized.
Qualified opportunity zone
partnership interest is any capital or
profits interest in a domestic partnership
that a QOF acquires after 2017 in
exchange for cash. The partnership
must be a qualified opportunity zone
business when the QOF acquires the
interest. The partnership must be
organized for the purpose of being a
qualified opportunity zone business.
The partnership must qualify as a
qualified opportunity zone business for
substantially all of the time the QOF
holds the interest.
A partnership organized in a U.S.
possession is a domestic partnership for
this purpose only if the partnership
conducts a qualified opportunity zone
business in the U.S. possession in
which the partnership is organized.
Qualified opportunity zone
business property is tangible property
that a QOF acquires after 2017 and
uses in a trade or business and that
satisfies both of the following tests.
1. The use of the property in the
qualified opportunity zone originates
with the QOF, or the QOF substantially
improves the property.
2. During substantially all of the
QOF's holding period for such property,
substantially all of the use of such
property was in a qualified opportunity
zone.
To satisfy the test in (1) above, the QOF
substantially improves property if,
during any 30-month period beginning
after the date of the acquisition of such
property, additions to basis with respect
to such property in the hands of the
QOF are more than an amount equal to
the adjusted basis of such property at
the beginning of such 30-month period
in the hands of the QOF.
Qualified opportunity zone
business is a trade or business if
substantially all of its owned or leased
tangible property is qualified opportunity
zone business property, defined earlier,
and if the trade or business satisfies all
of the following tests.
1. The business generates at least
50% of its total gross income from the

active conduct of a qualifying trade or
business.
2. The business uses a substantial
part of its intangible property in the
active conduct of any such business.
3. Less than 5% of the average of
the total unadjusted basis of the
property of the business is from
nonqualified financial property.
4. The business is not a private or
commercial golf course, country club,
massage parlor, hot tub facility, suntan
facility, racetrack or other facility used
for gambling, or any store the principal
business of which is the sale of
alcoholic beverages for consumption off
premises.
U.S. possession. A U.S. possession is
any jurisdiction other than the 50 states
and the District of Columbia where there
is a designated qualified opportunity
zone, which includes the following U.S.
territories: American Samoa, Guam, the
Commonwealth of the Northern Mariana
Islands, the Commonwealth of Puerto
Rico, and the U.S. Virgin Islands.
Nonqualified financial property.
Debt, stock, partnership interests,
options, futures contracts, forward
contracts, warrants, notional principal
contracts, annuities, and other similar
property. The definition does not include
reasonable amounts of working capital
held as cash, cash equivalents, or debt
instruments with a term of 18 months or
less.

Who Must File

Corporations or partnerships that are
organized and operated as a QOF must
file Form 8996 annually with one of the
following tax returns.
• Form 1120, U.S. Corporation Income
Tax Return.
• Form 1120-F, U.S. Income Tax
Return of a Foreign Corporation. See
note below.
• Form 1120-REIT, U.S. Income Tax
Return for Real Estate Investment
Trusts.
• Form 1120S, U.S. Income Tax Return
for an S Corporation.
• Form 1065, U.S. Return of
Partnership Income.
File Form 8996 by the due date of the
tax return (including extensions).
Note. Only QOFs organized in a U.S.
possession should attach this form with
their Form 1120-F.

Specific Instructions
Name and Employer
Identification Number

Enter the same information as shown on
the QOF’s applicable tax return under
Who Must File, earlier.

Part I

Complete Part I to certify that the
corporation or partnership was
organized to operate as a QOF. See
Definitions, earlier.

Line 3

Check “Yes” if you are certifying that this
is the first period in which you are a
QOF, and fill out line 4.

If you answer “Yes” on line 3,
your organizing documents
CAUTION must include a statement of
your purpose of investing in qualified
opportunity zone property by the end of
your first QOF year. The documents
should include a description of the
qualified opportunity zone business(es)
that the QOF expects to engage in,
either directly or indirectly through a
first-tier operating entity.

!

If you check “No,” you are indicating
that you have certified in a prior year
that you are a QOF. Continue to Part II
and Part III to determine if the QOF met
the investment standard for this tax
year.

Line 4

Provide the first month in which you
chose to be a QOF.
Example 1. A new corporation is
formed on January 5, 2018, for the
purpose of operating a QOF, but it does
not receive until April 2018 any
investment under a deferral election
under section 1400Z-2(a). The
corporation may choose any month
from January through April 2018 to use
as a certification date. This example
also applies to pre-existing corporations
or partnerships that become a QOF.

Part II

Complete Part II annually and attach it
to your applicable tax return listed under
Who Must File, earlier. Part II
determines whether you meet the 90%
investment standard for a QOF. See
Definitions, earlier.

Value determination. If you prepare a
financial statement that you file with the
SEC or with a federal agency other than
the IRS or if you have a certified audited
financial statement that is prepared in
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accordance with U.S. GAAP, then use
the value of the assets reported on this
financial statement. In other cases, use
the QOF’s cost basis of the asset on the
date of acquisition by the QOF.
Cash as qualified opportunity zone
property of a qualified opportunity
zone business. You can exclude
reasonable amounts of working capital
from the value of property that is treated
as nonqualified financial property. See
Definitions, earlier. A reasonable
amount of working capital satisfies all of
the following tests.
1. The working capital is designated
in writing for the acquisition,
construction, and/or substantial
improvement of tangible property in a
qualified opportunity zone.
2. There is a reasonable written
schedule for the expeditious
consumption of the working capital to
achieve the goal set out in (1) above.
3. The working capital will be
completely consumed no later than 31
months after the amounts are first
invested in eligible interests in the
relevant QOF.
4. The working capital is consumed
in a manner that is substantially
consistent with the requirements in
items (1) through (3).

Line 5

Enter the value of qualified opportunity
zone property (see Definitions, earlier)
held by the QOF on the last day of the
first 6-month period of the tax year.

Special rule for first year of QOF. If
you answered “Yes” on line 3, the
6-month period starts from the month
you indicated on line 4. Line 5 may be
blank depending on the tax year and the
month indicated on line 4.
If you check “Yes” on line 3, but
do not list the first month in
CAUTION which you choose to be a QOF
on line 4, the 6-month period of the QOF
starts on the first day of your tax year,
even if the QOF bought no qualified
opportunity zone property until later in
the year.

!

Example 2. Virginia, Joe, Laura,
and Ishmael formed a new partnership
in January 2018 for the purposes of
operating as a QOF, but it does not
receive until July 2018 any investments
under a deferral election under section
1400Z-2(a). The partnership has a
calendar year tax year. The QOF may
choose any month from January
through July 2018 to use as its first
month for certification. It chooses April
Instructions for Form 8996 (Dec. 2018)

2018. The first 6-month period for the
QOF asset test ends on September 30.
January to March are not considered for
purposes of the 6-month period.
Example 3. The facts are the same
as in Example 2, except the partnership
chooses July 2018 as the certification
date. The first 6-month period for the
QOF assets ends on December 31. The
6 months from January through June
are not considered, and lines 5 through
7 will be blank.

Line 6

Enter the value of total assets held by
the QOF on the last day of the first
6-month period of the tax year.
If you checked “Yes” on line 3, the
6-month period starts from the month
you indicated on line 4. Line 6 may be
blank depending on the tax year and the
month indicated on line 4. See the
discussion for line 5 and see Example 3
under Line 5, earlier.

Line 7

Divide the number on line 5 by the
number on line 6. Enter the result on
line 7 as a decimal to two places. Round
the number up or down to two places if
necessary. For third place numbers of 5
or more, round up to the next higher
second place number. For third place
numbers of less than 5, round down to
the lower second place number. Enter
the decimal using the following format:
one digit, a decimal point, and two digits
(for example, enter 92% as 0.92 and
100% as 1.00).

Example 4. The facts are the same
as in Example 2. The value of the assets
held by the partnership on September
30 is $89,500. The value of the assets
held by the partnership on December
31, is $100,000. The partnership enters
“89,500” on line 5 and “100,000” on
line 6. The result when the partnership
divides 89,500 by 100,000 is 0.895. The
partnership rounds up to 0.90. On line 7,
the partnership enters “0.90.”
If the figure entered on line 7 is less
than 90% (0.90), a penalty may apply.
See Part III of the instructions for more
details. Enter -0- if lines 5 and 6 are
blank.

Line 8

Enter the value of qualified opportunity
zone property (see Definitions, earlier)
held by the QOF on the last day of the
tax year.
Note. If you answered “Yes” on line 3,
the tax year may be less than 12
months.

Instructions for Form 8996 (Dec. 2018)

Line 9

Enter the value of total assets held by
the QOF on the last day of the tax year.
Note. If you checked “Yes” on line 3,
the tax year may be less than 12
months.

Line 10

Divide the number on line 8 by the
number on line 9. Enter the result on
line 10 as a decimal to two places.
Round the number up or down to two
places if necessary. For third place
numbers of 5 or more, round up to the
next higher second place number. For
third place numbers of less than 5,
round down to the lower second place
number. See Example 4. Enter the
decimal using the following format: one
digit, a decimal point, and two digits (for
example, enter 92% as 0.92 and 100%
as 1.00).

Part III

Complete Part III annually and attach it
to your applicable tax return listed under
Who Must File, earlier. Part III
determines whether you are subject to a
penalty. See Qualified opportunity fund
in Definitions, earlier.

Line 11

Add the numbers on lines 7 and 10.
Enter the result on line 11 as a decimal
to two places. Round the number up or
down to two places if necessary. For
third place numbers of 5 or more, round
up to the next higher second place
number. For third place numbers of less
than 5, round down to the lower second
place number. See Example 4. Enter
the decimal using the following format:
one digit, a decimal point, and two digits
(for example, enter 92% as 0.92 and
100% as 1.00).

Line 12

If lines 5 and 6 are blank, then divide
line 11 by 1.0 instead of 2.0, and enter
the result. Enter the result on line 12 as
a decimal to two places. Round the
number up or down to two places if
necessary. For third place numbers of 5
or more, round up to the next higher
second place number. For third place
numbers of less than 5, round down to
the lower second place number. See
Example 4. Enter the decimal using the
following format: one digit, a decimal
point, and two digits (for example, enter
92% as 0.92 and 100% as 1.00).

Line 13

If you checked “Yes,” the QOF met the
90% investment standard. Attach the
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form to your tax return to report you met
the investment standard for the current
tax year.
If you checked “No,” the QOF failed
to meet the 90% investment standard.
Go to Part IV to figure the penalty for
each month the QOF did not satisfy that
investment standard. The IRS will issue
a notice regarding the penalty reported
on line 13. This notice will include
instructions on the penalty, the
reasonable cause relief process, and
payment instructions.

Part IV

Complete Part IV if you checked “No” on
Part III, line 13. Use Part IV to figure the
penalty for each month that the QOF did
not hold at least 90% of its assets in
qualified opportunity zone property. See
Definitions, earlier.
Accounting period. Columns (a)
through (l) in Part IV assume that the
QOF was in existence for the full tax
year (January to December for calendar
year or 12 consecutive months for fiscal
year). See Pub. 538, Accounting
Periods and Methods, for more
information on accounting periods.
If you answered “Yes” on Part I,
line 3, and the QOF did not exist
CAUTION for the full tax year, you will not
use all of the columns in Part IV.
Instead, use the month listed on Part I,
line 4, as your Month 1 (see column (a)
of Part IV of the form), and continue
using the other columns as needed to
complete the tax year.

!

Example 5. The facts are the same
as in Example 2 under the Part I, line 5,
instructions, earlier. In that situation, the
partnership entered April on Part I,
line 4. The answer to Part III, line 13,
was “No.” When filling out Part IV, the
partnership will enter months only in
columns (a) through (i), because April
would be Month 1 and December would
be Month 9.

Lines 1 and 3

See Value determination, earlier, for
information on what figure to enter on
these lines.

Line 5

The figure to enter here is the interest
rate for each calendar quarter, which
the IRS will determine during the first
month in the preceding quarter. These
rates are published quarterly in an IRS
news release and in a revenue ruling in
the Internal Revenue Bulletin (IRB). Go
to IRS.gov/IRB for the IRBs. You can
subscribe to IRS Newswire to receive

news releases of the quarterly interest
rates, and IRS GuideWire to receive
emails with a link to the revenue rulings
in which the quarterly interest rates are
published by going to IRS.gov/uac/ENews-Subscriptions-2.

to carry out the Internal Revenue laws of
the United States. You are required to
give us the information. We need it to
ensure that you are complying with
these laws and to allow us to figure and
collect the right amount of tax.

Line 7

You are not required to provide the
information requested on a form that is
subject to the Paperwork Reduction Act
unless the form displays a valid OMB
control number. Books or records
relating to a form or its instructions must
be retained as long as their contents
may become material in the
administration of any Internal Revenue

Divide line 6 by 12 even if you answered
“Yes” in Part I, line 3, and the QOF did
not exist for a full tax year. This is
because the underpayment rate used
on line 5 is annualized.
Paperwork Reduction Act Notice.
We ask for the information on this form

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law. Generally, tax returns and return
information are confidential, as required
by Code section 6103.
The average time and expense
required to complete and file this form
will vary depending on individual
circumstances. For the estimated
averages, see the instructions for your
income tax return.
If you have suggestions for making
this form simpler, we would be happy to
hear from you. See the instructions for
your income tax return.

Instructions for Form 8996 (Dec. 2018)