Operating-agreement checklist

35 provisions a QOF or QOZB operating agreement should cover, each with the reason and the rule it comes from. Print it and take it to your attorney. IRC §1400Z-2; Reg. §§1.1400Z2(a)-1 to (f)-1

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Educational checklist, not legal advice. It lists what the Opportunity Zone rules require or reward; the wording of each provision depends on your entity, state and investors, and an attorney has to draft it. Items marked Proposed come from REG-116506-25 (proposed September 2026) and are not yet in force.

1. Fund formation and self-certification

A QOF is any corporation or partnership that self-certifies on Form 8996 filed with its first return. The organizing documents and that first filing fix the entity type, the purpose and the first month of QOF status.

Organize as a corporation or a partnership for federal tax purposes (an LLC taxed as either), formed under the law of a state, the District of Columbia or a U.S. possession.Why: Only an entity taxed as a corporation or partnership can be a QOF; a single-member LLC that is disregarded cannot. IRC §1400Z-2(d)(1); Reg. §1.1400Z2(d)-1(a)
State in the certificate or operating agreement that the entity is organized for the purpose of investing in qualified opportunity zone property, and describe the business it will invest in.Why: Form 8996 Part I asks whether the organizing document states this purpose; it is a condition of self-certification. Form 8996, Part I; Reg. §1.1400Z2(d)-1(a)
Choose the first month of QOF status and authorize the manager to elect it on Form 8996 filed with the first return.Why: Capital contributed before the chosen month is not a qualifying investment, and a month chosen before capital arrives starts the 90% clock early. IRC §1400Z-2(d)(1); Form 8996 instructions; Reg. §1.1400Z2(d)-1(a)(2)
Pick the valuation method for the 90% test (applicable financial statement or unadjusted cost) and require it to be applied consistently.Why: The method changes every testing-date figure and must be used for the whole year. Reg. §1.1400Z2(d)-1(b); Form 8996 instructions
If an existing entity converts, confirm its QOZ stock, partnership interests and business property were acquired after December 31, 2017.Why: Property acquired earlier never counts toward the 90% test, however the entity is certified. IRC §1400Z-2(d)(2)(B)–(D)
Give the manager authority to make and revoke the OZ elections, sign Form 8996 and engage valuation and tax advisers at the fund's expense.Why: Each testing date and filing needs a decision-maker named in the agreement, not an after-the-fact consent. Form 8996 instructions

2. 90% investment standard covenants

The fund must hold at least 90% of its assets in QOZ property, measured as the average of two testing dates each year. These covenants keep the fund inside that standard and say what happens when it is not.

Covenant to hold at least 90% of total assets in QOZ property on the last day of the first six months of the tax year and on the last day of the year, and to value assets on each date.Why: Form 8996 Part III reports the average of the two dates; falling short triggers a penalty for every month below 90%. IRC §1400Z-2(d)(1), (f)(1); Reg. §1.1400Z2(d)-1(a)(2)
Allow the manager to hold contributions received in the six months before a testing date in cash, cash equivalents or debt instruments with a term of 18 months or less, and exclude them from the test.Why: Money raised just before a testing date would otherwise drag the ratio below 90% before it can be deployed. Reg. §1.1400Z2(d)-1(b)(2)(i)(B)
Treat proceeds from a sale of QOZ property as QOZ property for up to 12 months while they are held in cash, cash equivalents or short debt and reinvested.Why: Without the reinvestment rule a sale mid-year can fail the next testing date even though the money is being redeployed. Reg. §1.1400Z2(f)-1(b)
Require prompt notice to investors of a projected shortfall and a written record of the reasons, and set out who bears the penalty (the fund, the manager or a capital-account allocation).Why: The penalty is waived only on a showing of reasonable cause, and a QOZB gets a single six-month cure period, so the facts have to be documented as they happen. IRC §1400Z-2(f)(3); Reg. §1.1400Z2(d)-1(d)(6)
Require monthly tracking of QOZ property against total assets, with the penalty computed as the shortfall times the underpayment rate for each month short.Why: The penalty accrues monthly, so a shortfall found at year end has already cost six months of interest. IRC §1400Z-2(f)(1); Form 8996, Part IV

3. QOZB covenants

When the fund invests through a subsidiary, the subsidiary's agreement (and the fund's investment documents) carry the qualified opportunity zone business tests.

At least 70% of the tangible property the business owns or leases is QOZ business property.Why: "Substantially all" of the tangible property is the threshold; a failure makes the whole interest non-qualifying for the fund's 90% test. IRC §1400Z-2(d)(3)(A)(i); Reg. §1.1400Z2(d)-1(d)(3)
At least 50% of gross income comes from the active conduct of a trade or business in a zone, using one of the safe harbors (hours worked, amounts paid, or where the property and management functions are).Why: Pick and document the safe harbor in advance; it decides what records the business keeps. IRC §1397C(b)(2); Reg. §1.1400Z2(d)-1(d)(5)(i)
At least 40% of intangible property is used in the active conduct of the business in a zone.Why: Licences, software and goodwill held outside the zone count against the business. IRC §1397C(b)(4); Reg. §1.1400Z2(d)-1(d)(5)(ii)
Less than 5% of the average unadjusted basis of its property is nonqualified financial property (cash beyond reasonable working capital, stock, debt, options).Why: Idle cash is the most common way an operating QOZB fails; the working-capital safe harbor is the fix. IRC §1397C(b)(8); Reg. §1.1400Z2(d)-1(d)(5)(iv)
Adopt a written working-capital plan with a schedule for spending the money within 31 months (up to 62 months for sequential infusions), and covenant to spend it substantially as planned.Why: Working capital covered by the safe harbor is not nonqualified financial property and its income counts toward the 50% test. Reg. §1.1400Z2(d)-1(d)(3)(v)
Prohibit a "sin business": private or commercial golf course, country club, massage parlor, hot tub or suntan facility, racetrack or other gambling facility, or a store whose principal business is selling alcohol for off-premises consumption.Why: These businesses can never be a QOZB, whatever the other tests show. IRC §144(c)(6)(B) via §1400Z-2(d)(3)(A)(iii)
For used property, covenant to substantially improve it within 30 months: additions to basis exceeding the property's adjusted basis at acquisition (50% of basis in a rural zone).Why: Used property is QOZ business property only if its original use begins with the business or it is substantially improved. IRC §1400Z-2(d)(2)(D)(ii); Reg. §1.1400Z2(d)-2(b)(4)

4. Investor provisions

Each investor's deferral depends on what the fund lets them do with their interest. These provisions protect the deferral and the exits.

Restrict transfers, gifts, pledges and redemptions of interests, and require notice before any of them.Why: A transfer, a gift or a distribution beyond basis is an inclusion event that ends the investor's deferral early. Reg. §1.1400Z2(b)-1(c)
Limit distributions to each investor's basis in the interest (which starts at zero and grows with the step-ups and included gain), unless the investor consents.Why: A distribution in excess of basis is an inclusion event to that extent. IRC §1400Z-2(b)(2)(B); Reg. §1.1400Z2(b)-1(c)
Permit a tax distribution in early 2027 for OZ 1.0 investors, sized to the tax on the gain they include on December 31, 2026.Why: Every OZ 1.0 investor reports the remaining deferred gain for 2026; a distribution after inclusion is within basis because the included gain adds to it. IRC §1400Z-2(b)(1)(B), (b)(2)(B)(ii)
Give the manager authority to sell assets after the 10-year holding period and give investors the information they need to elect a fair-market-value basis, including for sales of assets by the fund.Why: The exclusion of appreciation is an election each investor makes on a qualifying exit after 10 years; the fund has to be able to deliver one. IRC §1400Z-2(c); Reg. §1.1400Z2(c)-1(b)
Track contributions that are not deferred gain as a separate, non-qualifying investment with its own capital account.Why: A mixed-funds investment gets OZ benefits only on the deferred-gain portion. IRC §1400Z-2(e)(1); Reg. §1.1400Z2(a)-1(b)
Record each investor's gain date, 180-day deadline and investment date, and require the investor to confirm the gain is eligible.Why: The fund supplies the dates every investor reports on Form 8997; a late investment is not a qualifying investment at all. IRC §1400Z-2(a)(1)(A); Reg. §1.1400Z2(a)-1(b)(4)

5. Reporting

What the fund files, what it gives investors, and what the proposed regulations would add.

File Form 8996 every year with the fund's return (Form 1065, 1120 or 1120-S) by the due date including extensions, with the Part III testing-date figures and any Part IV penalty.Why: The annual filing is how the fund keeps its QOF status; a missed year is a missed certification. Form 8996 instructions; IRC §§6072, 6081
Covenant to give each investor the data for Form 8997 (fund EIN, investment dates and amounts, dispositions) every year they hold a deferred-gain interest.Why: Investors file Form 8997 with their own returns each year; the fund is the only source of the figures. Form 8997 instructions; IRC §1400Z-2(a)
Keep testing-date valuations, QOZB test workpapers, the working-capital plan and inclusion-event records for the life of the fund.Why: Every test is substantiated at the fund level; the records must be available when the return is examined. IRC §6001
Prepare for the proposed QOF information return and investor statements: statements to investors by March 1 after any year with a disposition or inclusion event. ProposedWhy: If finalized, the return becomes a standalone information return with a daily penalty for late or incomplete filing. Proposed Reg. under IRC §6039K (REG-116506-25)
Require each QOZB to deliver its proposed annual statement to the fund by the first day of the second month after the QOZB's year end (February 1 for calendar years), with its compliance attestations. ProposedWhy: The fund's own filing would depend on the subsidiary's statement, so the subsidiary agreement should make it a covenant now. Proposed Reg. under IRC §6039L (REG-116506-25)
Say who bears the proposed §6726 penalty ($500 per day, capped at $10,000, or $50,000 for a QOF with more than $10M of gross assets) for a late, incomplete or incorrect Form 8996. ProposedWhy: The cap scales with the fund's size, so allocating it in the agreement avoids a dispute later. Proposed IRC §6726 (REG-116506-25)

6. Rural QROF election

For investments after December 31, 2026 (OZ 2.0). A qualified rural opportunity fund holds its QOZ property in rural zones and gives investors a larger step-up.

State whether the fund intends to qualify as a qualified rural opportunity fund, holding substantially all of its QOZ property in rural opportunity zones designated in the OZ 2.0 map.Why: The 30% step-up is available only to investors in a QROF; a fund that mixes rural and non-rural property loses it for everyone. IRC §1400Z-2 as amended by P.L. 119-21 (2025)
Covenant to keep QROF status through each investor's five-year anniversary, and give notice before any acquisition that would end it.Why: The step-up (30% in a QROF, 10% otherwise) is measured at the five-year inclusion date, not at the investment date. IRC §1400Z-2(b)(2)(B) as amended by P.L. 119-21 (2025)
For used rural property, covenant to improve it within 30 months by more than 50% of its adjusted basis (instead of 100%).Why: The lower rural threshold is what makes rehabilitation of existing rural buildings workable. IRC §1400Z-2(d)(2)(D)(ii) as amended by P.L. 119-21 (2025)
Require every property acquired after December 31, 2026 to be in a zone designated in the OZ 2.0 map, and confirm the tract's rural designation before closing.Why: Property bought after 2026 generally has to be in a newly designated zone to qualify; the rural label comes from the new map. IRS Notice 2026-40
Tell investors their deferred gain is included on the fifth anniversary of the investment (not December 31, 2026) and that the fair market value for the exclusion is frozen at the 30th anniversary.Why: OZ 2.0 investors have a rolling inclusion date, so the fund's tax-distribution and reporting provisions must work per investor. IRC §1400Z-2(b)(1), (c) as amended by P.L. 119-21 (2025)

Need someone to draft it?

Attorneys who form QOFs and QOZBs are listed by state, as paid placements shown alphabetically. Legal setup is typically $2,000–$5,000 per entity. Find an Opportunity Zone attorney

Not legal advice. Citations are to the Internal Revenue Code, the final regulations under §1400Z-2 (T.D. 9889) and, where marked, the proposed regulations in REG-116506-25. Confirm every provision with your attorney and tax adviser before adopting it.