New QOF Investor Reporting Requirement

In September 2019, the IRS released a draft version of new Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (“QOF”) Investments. The new form creates a reporting requirement for taxpayers to track QOF investments, including detail on the amount and character of capital gain. You can access the draft here.

The following items are the key highlights of the new form:

Purpose of the Form

Form 8997 will be used by QOF investors to report to the IRS the QOF investments and deferred gains held by such taxpayers at the beginning and end of the current tax year. Furthermore, detail on any capital gains deferred and invested in a QOF during the current tax year must be included along with detail on any QOF investments disposed of during the current tax year.

Who Must File

Form 8997 must be filed by eligible taxpayers that held a QOF investment at any point during a tax year. The form must be filed with the taxpayer’s timely filed federal tax return.

Information to Report

The form is divided into four parts:

Part I – Requires the reporting of a list of QOF investments held by a taxpayer at the beginning of a tax year. The detail required is the employer identification number (“EIN”) of the QOF, the date the QOF investment was acquired, and a description of the QOF investment. Furthermore, taxpayers must report the deferred gain held in each QOF investment—broken out between short- and long-term gains.

Part II – Requires the reporting of a list of QOF investments acquired in a tax year through the deferral of capital gain. The detail required matches what is needed in Part I.

Part III – Requires the reporting of a list of QOF investments disposed of in a tax year. The detail required is the EIN of the QOF, the date the QOF investment was sold or disposed of, and a description of the QOF investment disposed of. Furthermore, taxpayers must report the amount of previously deferred gain now included in taxable income—broken out between short- and long-term gains.

Part IV – Requires the reporting of a list of QOF investments held at the end of a tax year due to current- year capital-gain deferrals and prior-year deferrals. The detail required matches what is needed in Parts I and II.

The reporting provided by this new form should be able to provide the IRS the option of maintaining an inventory of QOF investments held by taxpayers. Additional QOF reporting requirements and investment tracking have been topics of significant discussion. This new form appears to be a step toward additional reporting. However, it remains to be seen whether this is just the first of many new reporting requirements that the industry can expect.