Tag Archives: opportunity zones

Revamped Opportunity Zone Financing

Opportunity Zones were created by the 2017 Tax Cuts and Jobs Act and provided an opportunity for equity investors to defer and reduce capital gains taxes when they reinvested profits from an existing project into qualified projects located in targeted and defined low-income Census Tracts. The Opportunity rules got a lot of play in some parts of the country for projects like urban renewal and renewable energy projects, but for various reasons, this never caught on for very many broadband projects.

Some of the shortfalls of the original rules have been modified by changes included in the One Big Beautiful Bill Act (OBBBA), These new rules are generically being referred to as OZ 2.0. The new rules will be effective on January 1, 2027, and States and Treasury are working to have the new rules and revised Opportunity Zones in place by then. These rules are a lot friendlier to investors and could be used as part of the funding stack for projects that include building fiber.

Following are the key changes in the OZ 2.0 rules:

  • Permanent Extension. The new rules are now permanent. The old rules expired at the end of 2026, meaning that in recent years, there was a diminished value in trying to take advantage of the benefits.
  • Rolling 5-Year Deferral. Investors can now defer capital gains for five full years from the date of an investment.
  • 10% Basis Step-Up. An investor who holds a Qualified Opportunity Fund (QOF) investment for 5 years receives a 10% step-up in basis, which means an increase in deferred gains.
  • 10-Year Gain Exclusion. If a QOF investment is held for at least 10 years, the investor gains a permanent exclusion from federal taxes for any new gains.
  • Extra Rural Benefit. Investments made through New Qualified Rural Opportunity Funds (QROFs) for projects in rural areas will earn a 30% basis step-up (instead of 10%) for a 5-year hold. Rural investment properties also face a lower substantial improvement threshold, reduced from 100% to 50% of the acquisition basis.
  • 30-Year Rule: Investments held for 30 years or longer are eligible for a basis step-up to fair market value without needing to dispose of the asset.

The new rules require redrawing the Opportunity Zone Map of eligible areas. Governors play a key role in the process, and communities that want to be included as Opportunity Zones should be lobbying their Governor to be included. An area can only be designated as an Opportunity Zone if median household incomes are less than 70% of the area-wide incomes (the old rules was 80%).

The new rules also come with increased reporting. Anybody using Opportunity Zone funding will have to file an annual report that describes the economic impact of the project as well as employment and investment data. There are defined penalties for non-compliance.

There is a lot of nonpartisan support for the new rules since they are aimed at attracting investments in both urban and rural low-income areas.

The original Opportunity Zone rules were commonly used as a way to get local investors to invest in local projects. Most large equity investors, like high-value individuals or family offices, who routinely experience capital gains from investments, and the Opportunity Zone rules allowed those gains to be deferred by investing in projects with local impact. It’s hopeful that the new rules will make it even easier to attract some equity investments into projects in low-income areas.

New Tax Rules and ISPs

The One Big Beautiful Bill (OBBB) creates some significant new benefits for building broadband networks. Following are the primary ones. Tax experts may glean some other ones out of the lengthy bill.

Bonus Depreciation is a tax incentive that allows businesses to immediately deduct a significant portion of the cost of building qualified assets, instead of spreading it out over as asset’s useful life. Before OBBB, bonus depreciation was being phased out. It was at 40% of the cost of a qualifying asset in 2025, 20% in 2026, and zero in 2027. OBB resets this back to 100%. There is also no dollar limit on newly used bonus depreciation.

Bonus depreciation can be applied to any asset with a useful life of twenty years or less. That means it can’t be applied to fiber, conduits, towers, and buildings, but can also be applied to all other components of building a new fiber or wireless network. Bonus depreciation applies to more than network assets and can be applied against vehicles, furniture, computers, and software. There are some limits on the amount that can be used for vehicles.

This is a big deal for somebody building a fiber network because it can provide tax relief at the time you are funding and building a network. Big ISPs see the value of this, and AT&T said after passage of the bill that the bonus depreciation provides an incentive for the company to accelerate construction for the 30 million planned new fiber passings.

There is one downside to note for bonus depreciation – if you sell an asset that took advantage of bonus depreciation before the end of its normal expected life, the seller forfeits the bonus depreciation and must recognize it as taxable income at the time of the sale. Note that businesses can still use normal 179 accelerated depreciation for fiber and other long-life assets.

Opportunity Zones: OBBB makes the opportunity zone program permanent. The program was set to sunset at the end of 2026. The opportunity zone program is aimed at promoting infrastructure investments in economically distressed areas. Qualified investments made in opportunity zones can generate deferred taxes and reduced capital gains. It’s been fairly easy to qualify fiber networks as eligible for opportunity zone benefits, particularly if the fiber projects were built in conjunction with other economic development initiatives.

There are maps online that show the areas where current opportunity zone investment apply. States will likely modify the maps starting in 2026 since the definition of eligible low-income communities has changed. The new rules are also friendlier for making investments in rural opportunity zones.

Interest Deductibility. OBBB permanently changes the adjusted taxable income formula used to calculate the amount of interest a business can deduct. The new formula is computed using Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and not the more limited EBIT.

R&D Deduction. This probably doesn’t benefit many ISPs, but OBBB restores the permanent ability to deduct research and development costs, including a one-time opportunity to deduct these expenses retroactively to January 1, 2022.