The working capital safe harbor: 31 months to spend QOZB cash

The working capital safe harbor lets a qualified opportunity zone business hold cash for up to 31 months while it builds or starts up, as long as the money is designated in writing for a business in a zone, covered by a written spending schedule, and spent substantially as planned (26 CFR 1.1400Z2(d)-1(d)(3)(v)). As of October 2026, start-ups can stretch it to 62 months, disaster areas get up to 24 more months, and Notice 2026-40 uses it to let 2018-zone projects keep buying property after 2026 if 10 percent of the planned money was received and 5 percent spent by December 31, 2026.

The safe harbor exists because of one QOZB test: less than 5 percent of the average of the business's aggregate unadjusted property bases may be nonqualified financial property, such as cash, stock or debt. Reasonable working capital is excepted, and the safe harbor defines "reasonable." The other QOZB tests are on qualified opportunity zone business.

Standard period

31 months from receipt

Start-ups

Up to 62 months

Disaster area

Up to 24 more months

2026 transition

10% received, 5% spent

The three requirements

Working capital assets are treated as reasonable in amount if all three of these are met (26 CFR 1.1400Z2(d)-1(d)(3)(v)(A)-(C)):

1. Designated in writing. The amounts are designated in writing for the development of a trade or business in a zone, including, where appropriate, acquiring, building or substantially improving tangible property there.
2. Reasonable written schedule. A written schedule, consistent with the ordinary start-up of a trade or business, provides for spending the working capital assets within 31 months of the business's receipt of them.
3. Spent consistently. The money is actually used in a manner substantially consistent with the writing and the schedule.

While unspent, the money must sit in working capital assets: cash, cash equivalents or debt instruments with a term of 18 months or less (26 CFR 1.1400Z2(d)-1(d)(3)(iv)).

The regulation's examples include a fast-food restaurant with a 20-month plan covering site selection, a lease, equipment, a franchise, permits and staff hiring, and a real estate partnership with written plans to buy land within a month and spend the rest on construction over the next 30 months. Both qualify.

Delays, disasters and multiple plans

Government action. If spending is delayed by waiting for government action on an application that is complete, the delay does not cause a failure of the "spent consistently" requirement (26 CFR 1.1400Z2(d)-1(d)(3)(v)(C)). Permits and zoning approvals are examples of government action. The application has to be complete for the protection to apply.

Federally declared disasters. A business in a zone within a federally declared disaster, as defined in section 165(i)(5)(A), may receive up to 24 additional months to spend its working capital, if it otherwise meets the safe harbor (paragraph (d)(3)(v)(D)).

More than one application. A business may use multiple overlapping or sequential applications of the safe harbor, as long as each one independently meets the three requirements (paragraph (d)(3)(v)(E)). The regulation's example is a technology company with a 30-month plan for its first raise and a separate 25-month plan for a second raise about 18 months later; both qualify.

The 62-month limit for start-ups

Paragraph (d)(3)(vi)(A) lets start-up businesses use one or more 31-month periods for a total of 62 months, through overlapping or sequential applications, if:

• each application independently meets the three requirements;
• the working capital from an expiring 31-month period was spent according to those requirements;
• later infusions form an integral part of the plan covered by the first period; and
• each application includes a substantial amount of working capital assets.

During a safe-harbor period, the regulations also protect the other QOZB tests (paragraph (d)(3)(vi)(B)-(D)). Income earned on the working capital counts toward the 50 percent gross income test. Intangible property bought or licensed under the plan meets the intangible use test while the business is on track. Tangible property bought, leased or improved under the plan is treated as qualifying property for the 70 percent tangible property test.

How this differs from the fund-level cash rules

The safe harbor is a business-level rule. A QOF holding cash directly uses different rules for its 90 percent test (see the 90 percent asset test):

• A QOF may leave out of its 90 percent test cash contributed within the 6 months before a test date, if held in cash, cash equivalents or short-term debt (26 CFR 1.1400Z2(d)-1(b)(2)(i)(B)(2)).
• Proceeds a QOF receives from a return of capital or a sale of Opportunity Zone property count as qualifying for 12 months if reinvested, with up to 12 more months in a federally declared disaster, and delay waiting on government action on a complete application does not cause a failure (26 CFR 1.1400Z2(f)-1(b)).

The Notice 2026-40 transition: 10 percent received, 5 percent spent

Property bought after December 31, 2026 for use in a 2018 zone generally cannot be qualified opportunity zone business property. Notice 2026-40 sec. 5.01(2)(b) makes an exception for property bought under a written plan that meets the working capital safe harbors, if all four of these are true:

1. the working capital plan was adopted on or before December 31, 2026;
2. the property acquisitions are made in a manner substantially consistent with that plan;
3. by December 31, 2026, the QOZB had received at least 10 percent of the total estimated working capital assets designated in writing under the plan; and
4. by December 31, 2026, the QOZB had spent at least 5 percent of that total.

Amounts the QOZB is required to spend under a binding agreement entered into before January 1, 2027 count as spent for the 5 percent test. QOF purchases of stock or partnership interests after 2026 under such a plan are treated as made after the "applicable date" (sec. 5.01(2)(c)). The notice sets no separate end date for these purchases; it ties them to a plan that meets the existing safe-harbor requirements, including its schedule.

A second exception covers ordinary-course replacements, such as new appliances or flooring in an existing apartment building; expansions do not qualify. Both exceptions, and the rule that lets businesses keep treating an expired 2018 zone as a zone for the property and income tests through December 31, 2047, are on the Notice 2026-40 transition rules.

What the IRS is still considering

Notice 2026-55 sec. 3.01(2) asks whether a QOZB should be permitted to modify a working capital plan, under what circumstances, whether a modified plan must stay "substantially consistent" with the original and how that phrase should be defined, and how this applies to overlapping or sequential plans. It also asks how spending working capital on property that may not qualify affects the 70 percent tangible property test. The same notice recalls that the IRS published proposed rules in 2021 (86 F.R. 19585) that included modifications to the working capital safe harbor. Comments are due November 23, 2026, and nothing has changed yet.

This page explains how the safe harbor works. It is not tax or legal advice, and a written plan and schedule should be prepared with a tax adviser. For construction debt drawn alongside safe-harbored equity, see Opportunity Zone construction loans.