Reminder: June 30, 2025, Is a Key Compliance Date for Qualified Opportunity Funds

As we approach mid-year, it’s important for Qualified Opportunity Funds (QOFs) to prepare for their first annual compliance test. For calendar-year QOFs, June 30, 2025, is the first testing date to determine compliance with the 90% investment standard, commonly known as the 90% test.

Understanding the 90% Test

To qualify and maintain status as a QOF, an entity must meet the 90% test. This means at least 90% of the fund’s total assets must be invested in Qualified Opportunity Zone (QOZ) property. Compliance is measured and reported annually on IRS Form 8996, which must be filed with the QOF’s federal income tax return.

What Qualifies as QOZ Property?

The IRS defines QOZ property to include:

• QOZ Stock: Stock in a corporation that maintains its status as a QOZ business (QOZB)
• QOZ Partnership Interests: Interests in a partnership that maintains its status as a QOZB.
• QOZ Business Property: Tangible property acquired after December 31, 2017, that is used in a trade or business within a qualified opportunity zone and meets certain use and improvement requirements.

Particularly, cash and other working capital do not qualify as QOZ property. Holding excessive cash on a testing date could cause a QOF to fall below the 90% threshold and risk noncompliance.

It’s important to note that an entity must satisfy several specific requirements to both qualify and maintain its status as a QOZB. While the compliance obligations for QOFs and QOZBs are distinct, they are closely interconnected and must be considered together.

Exceptions and Reinvestment Relief

There are limited exceptions. For example, the IRS allows a 12-month reinvestment period for proceeds from the sale of QOZ property, as long as the amounts are reinvested in replacement QOZ property within that timeframe. Additional relief may be available under certain circumstances, particularly in cases involving natural disasters or other cases involving reasonable cause.

How the 90% Test Is Measured

The 90% test is calculated as the average of the QOZ property ratios on two testing dates each year:

• June 30 (the end of the first 6-month period)
• December 31 (the end of the tax year)

Form 8996 requires QOFs to report the value of their QOZ property as a percentage of total assets on each testing date. If the average falls below 90%, the QOF may be subject to a monthly penalty on the shortfall amount. The penalty is calculated using the IRS’s applicable federal rate (AFR) plus 3%.

Action Item for QOFs

With June 30 approaching, calendar-year QOFs should proactively review their balance sheets to ensure that a sufficient portion of assets is invested in QOZ property. Effective cash management strategies leading into the June testing date can help ensure compliance by year-end, minimize risk of penalties, and support long-term success of the fund. Additionally, if a QOF is invested in the stock or partnership interest of a QOZB, it is important to analyze the compliance measures of the QOZB to ensure it meets the qualifications for its classification as a QOZB.

If you have questions about QOF or QOZB compliance, Form 8996, or need assistance reviewing your fund’s asset composition, our team is here to help.

‍