Mastering the 90% Asset Test

Overview

The 90% Asset Test serves as the primary compliance obligation for all QOFs, assessed semiannually. Non-compliance leads to recurring monthly excise taxes and may render the fund ineligible for all OZ advantages.

Testing Dates & Mechanics

Date	Description
June 30	The final day of the QOF’s taxable year’s initial six-month period
December 31	The last day of the taxable year

Compliance is determined by calculating the average of both dates. For instance, 88% plus 92% equals 90%, which is considered passing.

What Qualifies as QOZP?

A. QOZ Stock — This refers to C-corp equity obtained at its initial offering following Dec 31, 2017, purchased with cash. The corporation must operate as a QOZB for 90% of holding period.

B. QOZ Partnership Interests — A partnership interest purchased after Dec 31, 2017, using cash. It must meet the QOZB criteria for 90% of holding period.

C. Qualified OZ Business Property (QOZBP) — Tangible assets which meet the following conditions:

✅ Purchased following December 31, 2017
✅ Satisfies either the Original Use test or the Substantial Improvement test (requiring a doubling of basis within 30 months)
✅ Utilized within the OZ for at least 90% of its holding period

Penalty for Failure

Monthly excise taxes are imposed under IRC §1400Z-2 due to each month of non-adherence
Formula: Shortfall Amount × (Federal short-term rate + 3%)
This is reported using Form 8996

Qualifying vs. Non-Qualifying Assets

Qualifies ✅	Does NOT Qualify ❌
Undeveloped land (contingent on improvement within 30 months)	Cash not protected (NQFP)
Cash safeguarded by WCSH (for 31–62 months)	Businesses engaged in sin activities
Equipment and machinery employed within the OZ	Property held without a defined enhancement strategy
Recently completed construction assets put into use	Businesses exclusively operating on triple-net leases

The Institutional Two-Tier Structure


QOF Entity
  └─ holds QOZB equity (= QOZP) → easily passes 90% test
       └─ QOZB uses WCSH to hold cash while building

Compliance Checklist

Categorize every QOF asset as either QOZP or non-QOZP
Compute the 90% average considering the June 30 and December 31 assessment dates
Confirm that WCSH plans adequately secure all cash reserves
Keep track of ongoing 30-month Substantial Improvement periods
Record all computations and append them to Form 8996