How you structure an Opportunity Zone investment can give you more time to put the money to work.

How you structure an Opportunity Zone investment can give you more time to put the money to work.

A qualified opportunity fund, or QOF, can potentially hold eligible contributions for six months before investing in a separate qualified opportunity zone business, or QOZB. The QOZB can then use its 31-month working capital safe harbor. That flexibility comes from coordinating two different rules at two different entity levels.

At the QOF level, eligible contributions received no more than six months before an asset-testing date can be excluded from the 90% investment test. From the fifth business day after receipt through that testing date, the money must remain in cash, cash equivalents or debt instruments with terms of 18 months or less. The contribution dates and testing dates have to be coordinated.

The QOZB's 31-month period begins when the business receives the money. It does not begin when the investor contributes to the QOF. That distinction can make a real difference when a project needs time for planning, approvals and construction.

The entity holding the cash matters as well. The working capital safe harbor applies at the QOZB level. Simply placing the project in a disregarded LLC owned by the QOF does not create the separate corporation or partnership needed for this two-tier treatment.

The safe harbor requires more than an intention to develop something in the zone. The business must designate the working capital in writing for developing its trade or business, have a reasonable written spending schedule providing for expenditure within 31 months of receipt and actually use the funds in a manner substantially consistent with that plan and schedule.

The written tax plan and the actual development budget should be developed together. Land, construction, equipment and other necessary business expenditures should be identified, along with when the business expects to pay them. The construction team and the return preparer should be working from the same funding schedule.

Both entities still have to meet their applicable requirements. That includes the QOF's 90% asset test and the QOZB's qualifying property, business income and other operating rules, taking account of the available startup relief. The working capital safe harbor does not replace the rest of the compliance work.

A plan crossing into 2027 also needs a review of the Opportunity Zone transition guidance. Holding funds at the QOF first cannot be considered independently of the requirements that apply to the project.

The structure, funding dates and written plan should be developed together, before the money moves. The potential six months plus 31 months is useful planning flexibility when the structure and compliance support it.

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