The 31-month Working Capital Safe Harbor (WCSH) is a provision within the Opportunity Zone (OZ) program that provides flexibility to Qualified Opportunity Zone Businesses (QOZBs) when holding and deploying working capital. It allows these businesses to temporarily hold cash and other liquid assets without violating the program’s requirements for tangible property and active business use. This safe harbor is particularly important for real estate development and operating businesses that need time to plan, construct, or improve property within an Opportunity Zone.

Below, we’ll explore how the rule works, why it exists, and how it benefits Opportunity Zone investors.

Purpose of the 31-Month Working Capital Safe Harbor

The Opportunity Zone program was created to encourage long-term investments in economically distressed communities. However, large-scale real estate developments or new business ventures often require significant time for planning, permitting, and construction. Immediate use of all invested capital is rarely feasible.

To address this challenge, the IRS established the 31-month Working Capital Safe Harbor. This rule allows QOZBs to hold working capital for up to 31 months without risking non-compliance with the program’s requirements. The key purpose of this rule is to accommodate the natural timelines of project planning and construction while ensuring that the funds are ultimately used to improve the Opportunity Zone.

Key Requirements of the 31-Month Working Capital Safe Harbor

To qualify for the safe harbor, a QOZB must meet several specific criteria. Failure to comply with these requirements could result in the business losing its status as a Qualified Opportunity Zone Business, thereby jeopardizing the tax benefits of the investment.

1. Written Plan

The QOZB must have a written plan that clearly outlines the use of the working capital. This plan should specify how the capital will be used to acquire, construct, or substantially improve tangible property within the Opportunity Zone.

2. Written Schedule

The business must also create a written schedule that details the timeline for deploying the working capital. The schedule must demonstrate that the capital will be used within 31 months from the date it is acquired.

3. Consistency and Diligence

The working capital must be used in a manner that is substantially consistent with both the written plan and the written schedule. Any deviations could result in non-compliance, leading to penalties or disqualification of the investment.

4. Reasonable Working Capital Amounts

The amount of working capital held must be reasonable in relation to the scope of the planned improvements or business activities. Excessive cash reserves without a clear purpose may not qualify.

5. Special COVID-19 Extension

Due to pandemic-related disruptions, the IRS allowed a 24-month extension to the 31-month safe harbor, effectively permitting up to 55 months for projects impacted by COVID-19. Although this extension applied primarily to projects started before the pandemic, it highlights the IRS’s recognition of real-world challenges in project timelines.

Non-Qualified Financial Property (NQFP) and the Safe Harbor

What Is NQFP?

Non-Qualified Financial Property (NQFP) includes:

Debt instruments
Stock
Partnership interests
Options, futures, or forward contracts
Warrants
Annuities
Excessive cash reserves not actively used in the business

For a QOZB to qualify under the OZ program, less than 5% of its assets can be NQFP. Holding too much cash or other financial assets without actively deploying them can disqualify a business from the program’s benefits.

How the Safe Harbor Protects Against NQFP Classification

Typically, cash or working capital could be classified as NQFP. However, the 31-month working capital safe harbor rule allows cash to be treated as a qualified asset during the safe harbor period, as long as:

The cash is designated for qualified use (e.g., construction or substantial improvement).
The QOZB follows the written plan and schedule.
The cash is ultimately used as outlined within the 31-month period.

By properly documenting the intended use of funds and adhering to the timeline, the QOZB can safely hold cash without it being considered NQFP, thereby maintaining compliance with the OZ requirements.

How the Safe Harbor Supports OZ Compliance

One of the main challenges for QOZBs is meeting the requirement that at least 70% of their tangible property be located in the Opportunity Zone. If working capital is held without being deployed, it may count as non-qualifying property, putting the business at risk of losing its QOZB status.

The 31-month safe harbor helps solve this problem by allowing QOZBs to treat their working capital as qualifying property during the planning and development phase—provided they adhere to the plan and schedule. This means that even if the project has not yet started or is in early stages, the capital held is not counted against the business’s asset test.

Impact on the 90% Investment Standard

The 31-month Working Capital Safe Harbor also plays a critical role in helping QOFs meet the 90% investment standard.

How It Helps QOF Compliance

Since a QOF must hold at least 90% of its assets in Qualified Opportunity Zone Property (QOZP), cash reserves can present a compliance risk.
If a QOF is holding cash intended for development, this cash could be considered non-qualified financial property (NQFP) unless protected by the safe harbor.
By adopting the 31-month working capital safe harbor, the QOZB can treat the cash as a qualified asset, thereby allowing the QOF to count it toward the 90% threshold.

Practical Example

A QOF raises $5 million for a development project in an Opportunity Zone. Due to permitting delays, the cash remains unspent for several months.

Without the safe harbor, this cash would count as NQFP, risking non-compliance.
By properly documenting the intended use of the funds and adhering to the 31-month plan, the cash remains qualified under the safe harbor.
This allows the QOF to maintain its 90% investment standard while awaiting project commencement.

Interplay with the 30-Month Substantial Improvement Rule

The 31-month Working Capital Safe Harbor often overlaps with the 30-month substantial improvement rule, especially in real estate projects.

How They Work Together

The 30-month rule requires that a QOF substantially improve acquired property by doubling its adjusted basis within 30 months. Since construction or substantial improvements often take time, the 31-month safe harbor allows the QOZB to hold cash designated for those improvements without it being classified as NQFP.

Strategic Planning

If a QOZB drafts a working capital plan that aligns with the substantial improvement timeline, the 31-month period can protect the cash reserves while the 30-month improvement work is underway. This coordinated approach helps ensure that both the financial planning and physical improvements remain compliant.

Real-World Example

Imagine a QOZB acquires a vacant building within an Opportunity Zone for $1 million. The company plans to invest $800,000 to rehabilitate the structure, but the project requires architectural planning, permitting, and phased construction.

The QOZB prepares a written plan outlining how the funds will be used for construction, renovation, and improvements.
The company also drafts a written schedule that maps out the project timeline over 31 months.
Due to delays in obtaining building permits, the project starts later than anticipated. However, because the QOZB consistently follows the plan and adheres to the schedule, the working capital remains compliant under the safe harbor.

Conclusion

The 31-month Working Capital Safe Harbor is a critical tool that provides the necessary flexibility for QOZBs undertaking long-term, capital-intensive projects within Opportunity Zones. By allowing businesses to hold working capital for an extended period while maintaining compliance, the rule supports responsible development and aligns with the OZ program’s goal of revitalizing under-resourced communities.

By proactively utilizing both the 31-month safe harbor and the 30-month substantial improvement rule, investors can ensure that their projects remain compliant while balancing the practical needs of construction and development.

What is the 31-month working capital safe harbor rule for Opportunity Zones?