You need a business plan for the timing and nature of deployment of the working capital. You can't deviate from the business plan too far unless it's for reasons outside of your control, such as awaiting government approvals.
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What is the safe harbor for reasonable amounts of working capital in a QOZB?
What requirements do we need to fulfill?
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Certain rules of Section 1397C of the code, related to "non-qualified financial property," sometimes referred to as "NQFP," are incorporated into the OZ rules. NQFP is defined in Section 1397C(e). It defines NQFP as a wide range of financial items (as well as some not traditionally thought of as financial items, such as partnership interests and stock), but the definition excepts out "reasonable amounts of working capital held in cash, cash equivalents, or debt instruments with a term of 18 months or less." In addition, Section 1397C(b)(8) allows up to 5% of a the aggregate unadjusted basis of the entity's assets to be attributable to NQFP. With all of that in mind, an entity can have up to 5% invested in most anything, and it can have higher than that amount to the extent it is "reasonable amounts of working capital," provided that the reasonable amounts are invested in a limited number of investments ("cash, cash equivalents, or debt instruments with a term of 18 months or less"). Neither the code nor the regulations define what is a "reasonable amount of working capital," other than the OZ rule that allows money to be set aside to be used substantially in accordance with a reasonable 31-month written plan to acquire, build or rehabilitate QOZ business property. (There is a similar rule for the new markets tax credit, but it only allows money to be set aside that will be expended on construction of real property within 12 months). So, I'd say that if an entity wants to go beyond the 31-month exception that applies to OZ projects, it should probably get an expert to analyze its cash flow needs and present a report that could survive IRS scrutiny on why the entity needs more cash. Still, this plainly has a greater risk of scrutiny from the IRS (who might challenge the QOF's expert) than simply complying with the 31-month and 5% exceptions.
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