Blake Christian, HCVT Tax Partner | Austin Bowen, HCVT Tax Manager

April 8, 2026

The Opportunity Zone (OZ) program has always aimed to spur investment in economically distressed communities. Now, with the advent of the One Big Beautiful Bill Act (OBBBA) and the highly anticipated OZ 2.0, the program is poised for a significant evolution, particularly for operating businesses looking to thrive in rural areas. This new legislation introduces tailored benefits and clarifications that could redefine the landscape of rural economic development.

Opportunity Zone 1.0: Initial Adoption and Impact

Launched under the Tax Cuts and Jobs Act of 2017, the initial Opportunity Zone program (OZ 1.0) quickly garnered attention as a powerful tool for community development and tax-advantaged investment. While its full long-term impact is still being measured, significant progress and adoption have been observed:

• Total Equity Invested: By late 2023, reports indicated that an estimated $100 billion to $150 billion in equity had been invested into OZs across the country. This substantial capital infusion has funded a wide array of projects, from commercial real estate to operating businesses.
• Increased Housing: A significant portion of OZ 1.0 investment has gone into real estate development, including both affordable and market-rate housing. According to the Economic Innovation Group, “using modern difference-in-differences methods…OZs roughly doubled the total amount of new housing added to low-income communities from Q3 2019 to Q3 2024.”
• Number of Opportunity Zone Funds: Over 1,000 Qualified Opportunity Funds (QOFs) were established and certified by the IRS to pool and deploy capital into these zones. These funds varied widely in size and investment strategy, from large institutional vehicles to smaller, community-focused funds, reflecting the diverse opportunities within the program.

While the OZ Program has been widely adopted by real estate developers, family offices and serial entrepreneurs, private equity (PE)/venture capitalists (VC) and public companies have been slow or non-adopters.

With the OBBBA’s permanency and enhanced benefits beginning in 2027, we anticipate a huge inflow of OZ Funds over coming decades. We also foresee expanded adoption by PE managers and PE executives, VCs and public companies, all who have annual capital gain exist events.

OBBBA and OZ 2.0: More Deferral, More Benefits, New Census Tracts, New Rural Renaissance

The new legislation, effective January 1, 2027, ushers in OZ 2.0 with a distinct focus on rural areas, offering enhancements that directly address the hurdles previously faced by operating businesses. The primary objective is to make rural investments not just feasible, but genuinely attractive.

Here’s how OZ 2.0 is changing the game for rural operating businesses:

1. "Substantial Improvement" Test Relaxed for Rural QOF Projects:
   One of the most significant changes for operating businesses, particularly those requiring physical infrastructure, is the reduction of the "substantial improvement" requirement from 100% to 50% for rural QOF projects. This lower hurdle applies to even OZ 1.0 projects effective July 4, 2025 – the effective date of the OBBBA.
   
   This directly benefits operating businesses that acquire and improve existing real estate for their operations (e.g., manufacturing facilities, retail spaces, agricultural processing plants). The lower threshold makes it considerably easier and more cost-effective to qualify investments in existing structures, rather than requiring complete rebuilds or property values to double.
   
   For an operating business, this reduces the capital expenditure needed to meet a core qualification, freeing up funds for other business development activities like equipment, inventory, hiring and training.
   
   To obtain this benefit, rural OZ Funds must have at least a 90% rural property
2. 10% and 30% Basis Step-Ups Restored and Expanded:
   The original 10% basis increase (for 5-year investments) is reinstated for contributions made after 2026 and before 2034. However, the game-changer for rural operating businesses is the enhanced 30% basis step-up for qualifying rural OZ investments.
   
   This significantly improves the interim tax savings and long-term exit economics for investors in rural operating businesses.
   
   This enhanced reward encourages longer-term commitment to rural enterprises, directly addressing the need for sustained economic development in these areas.
   
   It is worth noting that the 5-year timeline for the basis adjustment starts on the day capital gains are invested into the QOF, not the date that the property is acquired.
3. Rolling Gain Deferral Period for 5 Years from QOF Funding Date(s):
   Investments made in the new round of zones after December 31, 2026, will now defer recognition of the original capital gain on a rolling five-year schedule. OZ 1.0 investors all report their deferred gains on December 31, OZ 2.0 investors will have varying gain recognition dates, 5 years from the QOF funding date(s).
   
   This provides greater flexibility for both real estate development, as well as investors in operating businesses, allowing them to manage their tax liabilities more effectively and potentially align deferral periods with their business growth cycles.
   
   A comparative OZ 1.0 and 2.0 chart is included at the end of this article.

Converting Existing Operating Businesses into Opportunity Zone Businesses

The OBBBA opens up significant opportunities not just for new real estate projects and new operating businesses, but also for existing operating businesses located within or near designated OZs. For many rural businesses, a capital injection through an Opportunity Fund can be transformative, allowing for expansion, modernization, and increased competitiveness.

Pathway to Qualification: An existing operating business can become a QOZB by receiving a substantial equity investment from a Qualified Opportunity Fund (QOF). The business must then meet the QOZB criteria, including the asset, income, wages, and intangible property tests.

Substantial Improvement Flexibility: For existing businesses that own their real estate, the relaxed "substantial improvement" test (50% for rural projects) is a game-changer. Rather than having to double the asset's basis with improvements, which was often prohibitive, existing businesses can now qualify with a more manageable investment in upgrades, expansions, or new equipment, making the QOF investment more accessible and impactful.

Access to New Capital: Becoming a QOZB makes an existing business attractive to QOFs seeking long-term, tax-advantaged investments. This provides a vital source of growth capital that might otherwise be difficult for rural businesses to secure, enabling them to expand operations, hire more employees, or develop new products and services.

Benefits for Original Owners (if reinvesting): If the original owners of an existing business generate a capital gain from the sale of their interest to a QOF, they may be able to defer or eliminate that gain by reinvesting it into another QOF, aligning their personal tax strategy with the growth of their former business.

Community Revitalization: By injecting capital into and growing existing local businesses, the OZ program directly supports job creation and economic stability in rural communities, fulfilling the core mission of the legislation.

INSIGHT: The Opportunity Zone Program—More Than Just a Real Estate Tool

The Grand Slams in OZ will be Operating Businesses, Not Real Estate

New Frontier: Data Warehouses and AI Computing in Rural OZs

The exponential growth of Artificial Intelligence (AI) and the increasing demand for data processing and storage are driving the need for vast, secure, and energy-efficient data infrastructure. Rural OZs are uniquely positioned to become a new frontier for these capital-intensive industries.

Lower Land and Operating Costs: Rural areas often offer significantly lower land acquisition costs compared to urban centers, a critical factor for constructing large-scale data warehouses and AI computing facilities. Furthermore, the availability of stable and often cheaper power, including access to renewable energy sources, can lead to substantial operational savings for these energy-hungry operations.

Strategic Location and Security: Locating data centers in rural areas can provide enhanced physical security and reduce risks associated with urban congestion, natural disasters, or geopolitical vulnerabilities. Many rural regions also boast robust fiber optic networks, essential for high-speed data transmission, or are prime locations for new network infrastructure development.

OZ 2.0 Alignment: The relaxed "substantial improvement" test (50% for rural projects) is particularly beneficial for data center development, which often involves retrofitting existing large industrial buildings or constructing purpose-built facilities. The enhanced 30% basis step-up for rural investments provides an unparalleled incentive for the long-term capital deployment required for these projects, offering significant tax advantages on exit after the 10-year holding period. The priority given to new rural OZ designations will open up more ideal locations, combining economic incentives with logistical advantages.

Workforce Development: While specialized, data center and AI operations also create a range of technical and operational jobs, offering opportunities for local workforce development and training programs, thereby contributing to the core mission of OZs.

Lower Taxes Result in Improved Cash Flow, Better EPS and Enhanced Total Returns for Private Equity and Venture Capital Investors

The OBBBA creates a particularly compelling landscape for PE and VC investors looking to deploy capital into operating businesses, especially those focused on rural growth. These changes directly address some of the unique considerations for funds that specialize in growing companies rather than just real estate.

With approximately 15% of the U.S. being OZ-eligible under OZ 1.0 and approximately 12% being eligible under OZ 2.0, there are plenty of opportunities for PE, VC and public companies to either start, acquire or move a portfolio company, division or headquarters into an OZ location, and start the 10-year tax exempt gain period.

Lowering effective tax rates: Companies will have a positive impact on cash flow, EPS and the communities they operate in. For the PE and VC funds and investors, tax deferral and tax-exempt gains can dramatically improve Internal Rates of Return (IRRs).

Enhanced Exit Economics (30% Basis Step-Up): For PE/VC funds, the ultimate goal is a profitable exit. The new 30% basis step-up for qualifying rural OZ investments dramatically enhances the after-tax returns upon exiting a 10-year QOF investment. This is a powerful incentive, as it directly impacts the carry and overall profitability of the fund, making investments in rural operating businesses more financially attractive than ever before. This long-term tax-free gain for the appreciation post-investment is a significant value driver.

Flexibility with Rolling Gain Deferral: PE/VC funds manage diverse portfolios with various investment horizons and planned and unplanned capital gain events. The rolling five-year gain deferral for new investments after December 31, 2026, offers unprecedented flexibility. This allows funds to time their QOF investments more strategically, aligning the deferral periods with their overall portfolio management and capital deployment cycles, rather than being constrained by a single, fixed deferral end date.

Reduced Capital Expenditure for Operating Business Property: Many operating businesses require physical infrastructure. The relaxed "substantial improvement" test (50% for rural projects) is highly beneficial. For a PE or VC fund acquiring an operating business that might need facility upgrades or expansions, this change significantly lowers the upfront capital required to meet OZ qualification rules, freeing up more capital for growth, R&D, and talent acquisition—core tenets of PE/VC strategies.

Access to a New Pool of Investable Businesses: The renewed focus and prioritization of rural census tracts means that new geographies become highly attractive for investment. This opens up a fresh pipeline of operating businesses that may have been overlooked previously, offering PE/VC funds opportunities for diversification and access to sectors or business models unique to rural economies (e.g., transportation hubs, agritech, sustainable manufacturing, rural healthcare tech). The potential for data warehouses and AI computing infrastructure further diversifies these opportunities.

Alignment with Impact Investing Goals: The OZ program inherently carries a strong social impact component. For PE/VC funds increasingly focusing on ESG (Environmental, Social, Governance) criteria and impact investing, investing in rural operating businesses through OZ 2.0 provides a clear pathway to generate both competitive financial returns and measurable community benefit, enhancing their appeal to a broader base of limited partners.

Key Differences: OZ 1.0 vs. OZ 2.0 for Rural Operating Businesses

Feature	OZ 1.0 (Prior Law)	OZ 2.0 (OBBBA)
Rural Focus	General, no specific rural prioritization	Explicit prioritization of rural census tracts in new designations
Substantial Improvement Test	100% increase in basis for existing property (challenging)	Relaxed to 50% for rural QOF projects, easing investment in existing assets
Basis Step-Up (Long-Term)	Original 10% step-up expired; no specific rural enhancement	Restored 10% step-up; enhanced 30% step-up for rural investments
Gain Deferral Period	Fixed deferral period tied to original investment date	Rolling 5-year deferral for investments after 12/31/2026, offering flexibility
Program Wind-Down	Original 2017 tracts wind down after 2028	New designations effective January 1, 2027 – December 31, 2033, with ongoing cycles

A Bright Future for Rural Operating Businesses

The OBBBA signals a clear commitment to fostering economic growth in underserved rural communities. By relaxing critical requirements, providing enhanced tax benefits, and explicitly prioritizing rural designations, OZ 2.0 significantly de-risks and incentivizes investments in rural operating businesses. Investors, fund managers, and entrepreneurs should proactively explore these new provisions to capitalize on the powerful potential of this evolving program. The stage is set for a new wave of investment, innovation, and job creation in America's rural heartland, with PE and VC poised to play a pivotal role, especially in emerging sectors like data warehousing and AI computing.