The Qualified Opportunity Zone (QOZ) program, created by the Tax Cuts and Jobs Act, was slated to expire after 2026. The One Big Beautiful Bill Act (OBBBA), however, extends and expands it.

The QOZ program incentivizes business investment in designated low-income communities around the country. Manufacturers that are considering re-shoring operations to the United States or building new facilities may find it easier to attract funding if they locate in a QOZ, especially one in a rural area.

QOZ program overview

The QOZ program generally allows taxpayers to defer eligible short- or long-term capital gains on sales of their investments by reinvesting those gains in a qualified opportunity fund (QOF) within 180 days. The main requirement to be a QOF is that the fund must maintain at least 90% of its assets in QOZ property. This includes investments in QOZ businesses, as well as new or substantially improved commercial buildings and equipment in a QOZ.

A manufacturer that's set up as a corporation or partnership generally can become a QOZ business — and in turn qualify for QOF funding — if:

  • At least 50% of its gross income comes from business activities within a QOZ,
  • At least 70% of the tangible property it owns or leases is QOZ business property used in the business,
  • At least 40% of its intangible property is used for business activities within a QOZ, and
  • Less than 5% of the average unadjusted bases of its property is attributable to nonqualified financial property.


QOF investors receive an equity interest in the fund, plus valuable tax perks. For example, under the original program, capital gains tax on the "rolled over" gains from the investment the investor sold are deferred until the earlier of 1) the sale or exchange of the taxpayer's QOF investment, or 2) December 31, 2026. After five years, the taxpayer receives a 10% step-up in tax basis, so only 90% of the rollover gain is taxable. After seven years, the step-up in tax basis increases to 15%. If a QOF investment is held for at least 10 years, gains attributable to appreciation of the QOF investment itself are fully excludable.

OBBBA changes

The OBBBA establishes a permanent QOZ program that features rolling 10-year QOZs that will first be available for investment on January 1, 2027. It also amends certain tax advantages.

Rollover gains can still be deferred temporarily, and taxpayers will continue to receive the 10% step-up in tax basis on the fifth year of the QOF investment. They must recognize the gain at that point, though, and no additional step-up is triggered after seven years. The permanent exclusion of gains attributable to appreciation of the QOF investment itself if the QOF is held for at least 10 years remains intact. It's available for up to 30 years after investment in the QOF.

Notably, the OBBBA also creates a new type of QOF, the qualified rural opportunity fund (QROF). Similar to a standard QOF, it must invest at least 90% in a rural QOZ. But it offers more generous tax benefits. Specifically, after five years, investors will receive a 30% step-up in tax basis on their rollover gain, rather than just 10%.

New guidance

The IRS has released Notice 2025-50, which addresses two critical aspects of the new QROF program:

1. "Rural area" definition. It defines "rural area" as any area other than:

  • A city or town with a population greater than 50,000, and
  • Any urbanized area contiguous and adjacent to such a city or town.

The IRS reports that over 3,300 of the more than 8,700 existing QOZs in the United States are entirely rural areas.

2. Threshold for satisfying the "substantial improvements" requirement for existing buildings. For standard QOZs, existing buildings are considered substantially improved if, during any 30-month period after the property is acquired, investments in the building exceed 100% of its initial adjusted basis. For rural areas, though, these investments need only exceed 50% of the building's initial adjusted basis.

More to come

Additional IRS guidance on QROFs is expected, but existing regulations already provide useful insights into standard QOFs. We can help you explore how the program could benefit your manufacturing company.