New Tax-Saving Opportunities for Manufacturers in Rural Qualified Opportunity Zones

If you’re a manufacturer considering re-shoring operations or building new facilities in the U.S., there’s good news, recent legislation has expanded tax incentives that could make rural locations more attractive than ever.

What’s Changing?

The Qualified Opportunity Zone (QOZ) program, originally created under the Tax Cuts and Jobs Act, was set to expire after 2026. Enter the One Big Beautiful Bill (OBBB), a sweeping tax reform that not only extends the program but makes it permanent and even more beneficial for rural areas.

Why QOZs Matter

QOZs are designated low-income communities where investments can unlock significant tax advantages. For manufacturers, locating in a QOZ, especially a rural one, can help attract funding through Qualified Opportunity Funds (QOFs). These funds invest in QOZ businesses and property, offering investors tax perks while fueling economic growth.

How it works:

• Investors can defer capital gains by reinvesting in a QOF within 180 days.
• QOFs must hold at least 90% of assets in QOZ property, which includes businesses, buildings, and equipment.
• Manufacturers can qualify as QOZ businesses if they meet criteria like:
  • 50% of gross income from QOZ activities
  • 70% of tangible property located in a QOZ
  • 40% of intangible property used in a QOZ
  • Less than 5% of assets in non-qualified financial property

Tax Benefits Under OBBB

The original program allowed:

• Deferral of capital gains until the earlier of selling the QOF investment or December 31, 2026.
• Step-up in basis 10% after five years, 15% after seven years.
• Full exclusion of gains on QOF appreciation if held for 10 years.

OBBB keeps the 10-year exclusion but changes the timeline:

• Gains must be recognized after five years (with a 10% basis increase).
• No additional step-up after seven years.
• The 10-year exclusion remains available for up to 30 years.

Introducing QROFs: A Rural Advantage

OBBB adds a new twist: Qualified Rural Opportunity Funds (QROFs). These funds invest 90% in rural QOZs and offer a 30% basis step-up after five years, triple the benefit of standard QOFs.

IRS Guidance Highlights

• Rural area defined: Any area outside cities with populations over 50,000 and their adjacent urbanized areas.
• Improvement threshold lowered: For rural QOZs, substantial improvements to existing buildings require only a 50% increase in basis (vs. 100% for standard zones).

What’s Next?

More IRS guidance is expected, but manufacturers should start planning now. Locating in a rural QOZ could mean easier access to capital and long-term tax savings.

If you’re exploring expansion or re-shoring, rural QOZs offer a compelling opportunity. With enhanced incentives under OBBB, these zones could be the key to unlocking both funding and tax advantages for your next big move.