QOFs are able to self-certify that they meet the 90 % Substantially All test on the Form 8996 filed with their tax returns. What kind of documents do they need to back this up?
Yes, QOFs self-certify on a form to the IRS attached to their tax returns. I think QOFs should keep reporting from the entities they invest in regarding how the businesses meet the various tests that need to be met by each QOZB. Exactly what will depend on the circumstances of each business.
Form 8996, as with any tax return, is subject to examination or audit by the IRS. The QOF must retain records that support amounts reported on the form. This would include financial statements, evidence of the amounts incurred to acquire assets, evidence of the location of the assets, depreciation schedules, evidence of expenditures made to make substantial improvements to property, and supporting calculations (tax work papers).
The burden is on the taxpayer, so fully documenting the assets held, their proper valuation and OZ location and program eligibility will be key. Fund managers really need to monitor these tests monthly to ensure semi-annual compliance.
I am not sure, but I think a balance sheet should be sufficient.
Ordinary business records. Audited financials. I would think that would do it.
Nothing specific. It would be good to have some sort of proof - worksheet appraisals.
Actual source documents on expenditures made supported by balance sheets.
The proposed regulations do not provide guidance on the documentation of the compliance. This will need to be determined and designed, depending on the amount of underlying property or businesses and the requirements and agreements with investors. Examples can be checklists and agreed upon procedures for the portfolio entities and the fund.
You report assets on Form 8996 itself, and you're subject to penalties if you misrepresent facts on that form. In the event of an audit, you'll at least need a balance sheet or another financial statement. You may need further documents beyond the balance sheet to substantiate what's listed.
90% test for QOF purposes means that they have to have 90% of all assets in QOZBP (assets). There is a clear definition of QOZBP in the code and regulations. It's basically tangible property located physically within the geographic borders of a zone (i.e., with an actual office location where these assets are physically located and, hence, evidence would be the lease agreement for the office, property tax bills, deeds of trust for real estate) or equity investments in QOZ businesses that have at least 70% of their assets as QOZBP, so the same document ideas would apply to the QOZ business. You won't attach these items to the return, but they would be available for inspection in the event of audit.
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