Insight

Qualified Opportunity Fund's Asset Testing Requirements

By Holly Belanger and Steven Schmoll

June 21, 2022 | As June 30 approaches, Qualified Opportunity Funds (QOF) are reminded to take a closer look at their Qualified Opportunity Zone (QOZ) investments to ensure compliance with the applicable statutory and regulatory requirements. Specifically, a QOF is required to hold at least 90 percent of its assets in Qualified Opportunity Zone Property (QOZP), which may include direct ownership of “qualified opportunity zone business property” or an ownership interest in a partnership or corporation that is treated as a Qualified Opportunity Zone Business (QOZB).1 The QOF must test, on a semiannual basis (generally on June 30 and December 31), that this 90-percent asset requirement is met.2 A QOF that fails to satisfy the 90-percent asset requirement for a particular tax year may be subject to certain statutory penalties, unless the QOF can establish reasonable cause for the failure.3

As a result of the COVID-19 pandemic, Treasury and the IRS issued Notices 2020-39 and 2021-10 (the “Notices”),4 which provided, among other relief, a reasonable cause exception for many QOFs. In particular, the Notices provided that for any QOF whose:

    (i) last day of the first six-month period of a taxable year, or

    (ii) last day of a taxable year

falls within the period beginning on April 1, 2020, and ending on June 30, 2021, any failure by that QOF to satisfy the 90-percent test for that taxable year of the QOF is due to reasonable cause under section 1400Z-2(f)(3). For any QOF formed before February 2021,5 this relief effectively put a “pause” on the 90-percent asset requirement for 2020 and 2021 as any failure was deemed to be due to reasonable cause.

The relief provided to these QOFs under the Notices expired with the 2021 tax year. QOFs are therefore reminded that care should be taken in reviewing their asset mix for the June 30, 2022 testing date to verify compliance with the applicable statutory and regulatory requirements.

If you have any questions or would like to discuss the requirements of section 1400Z-2, please reach out to your KPMG engagement team or contact a member of the KPMG national QOZ team, including:

Holly Belanger
Partner
407-883-9062

Orla O'Connor
Principal
646-284-4270

Joe Scalio
Partner
267-2778

Steven Schmoll
Director
202-417-4418

 


 

Footnotes

1 See, section 1400Z-2(d). Unless otherwise specified, all references to the term “section” refer to the Internal Revenue Code of 1986, as amended, and the regulations thereunder.

2 See, section 1400Z-2(d)(1).

3 Section 1400Z-2(f). In general, the penalty for failure to meet the 90-percent asset requirement is determined using the underpayment rate established under section 6621(a)(2) for such month (that is, 3 percentage points plus the Federal short-term rate). Section 1400Z-2(f)(1)(B).

4 Notice 2020-39 and Notice 2021-10.

5 Any QOF formed after January 2021 would not have had a testing date during the specified relief period (i.e., April 1, 2020 and June 30, 2021) and thus, was not eligible for the reasonable cause relief provided by the Notices.