This week, Treasury released IRS Revenue Procedure 2026-14 directing States on the process to designate Opportunity Zones in the OZ 2.0 process. The window for designation opens on July 1, 2026, and runs through September 30, 2026 with opportunities for extension. Notably, Treasury encourages States to be deliberate in their process, as any earlier designations will be deemed as being received on September 30, 2026.
As discussed in my earlier article, these choices will be critical for designating development areas for the next decade. The track record from the first round of Opportunity Zones shows that designations have been concentrated in areas where development opportunities are starting to emerge and will emerge in the future. It will be critical for states, communities and developers to learn from previous successes to make these designations count.
The tightening of requirements for low-income census tracts will substantially reduce the number of designations. Treasury has indicated that 1,032 tracts in Ohio are eligible for designation, which will allow for 258 designations. This is a 20% reduction from the 320 designated today. With fewer tracts eligible for designation, competition for designation will be tighter and communities and developers will have to make their strongest case for inclusion.
Treasury Clarifies Designation Rules, Provides an Escape Hatch
First, Treasury provides some clarification on sunset and implementation dates. Existing Opportunity Zone designations will sunset on December 31, 2028 in accordance with the prior law. Opportunity Zone 2.0 designations will be effective January 1, 2027 through December 31, 2036. This provides for a 2-year period where zones will overlap.
As a reminder, tracts must be eligible Low Income Communities (LICs) to be designated as an Opportunity Zone. LICs have either a median family income that does not exceed 70% of the metropolitan area’s median family income or a 20% poverty rate and a median family income that does not exceed 125% of the metropolitan area. Tracts that are outside of metro area use the state median income and poverty rate. The policy choice to use the median family income instead of the median household income, while not unusual, has significant implications – census tracts with large numbers of single residents, even high-poverty residents, may not qualify if the surrounding family units are higher-income. Census tracts with high numbers of students, apartments shared by roommates or non-family households are excluded.
Treasury provides an escape hatch, however, for census tracts that are not identified in this Revenue Procedure. Governors may demonstrate that tracts satisfy the LIC requirements using data collected at the census-tract level by submitting a detailed tract-by-tract analysis. Importantly, this escape hatch is data-driven, and any additional census tract must have data that shows that it meets the requirements of a LIC. This process does not allow for the addition of census tracts because of other economic or development considerations.
Building the Case for Additional Tracts
States and Communities looking to add non-eligible census tracts should begin data analysis immediately. This task is high-risk as States have the burden of proof, and Treasury provides little guidance as to its review process. The data analysis will require time and effort to have a chance of success.
Nonetheless, because LIC designation is based on American Community Survey (ACS) data, it comes with a high margin-of-error because the sampling methodology is limited at the community level. In downtown Cleveland, census tract 1077.01 (Gateway District) falls outside of the current designation. However, it is a good example of how a data-driven analysis could make a case for inclusion in the LIC list.
Three data-driven scenarios come to mind.
- A census tract that falls outside the standard may fall within the standard if the margin-of-error is considered. Using the 2020-24 data series, tract 1077.01 has a median family income of $149,531 with a margin of error of +/- $37,983. The bottom of this error band falls within the 125% requirement that, along with the poverty rate, would make that tract eligible for designation.
- A census tract that fell within the standard using previous data series but fell out in the 2020-24 data series. Using the 2019-23 data series, the census tract has a median family income of $111,382, which would fall within the 125% requirement. This provides further evidence that the 2024 data spike may be anomalous.
- Communities often have access to data through tax revenues and collections, community planning efforts and development materials that can provide a greater insight than ACS surface level data can show. Market studies and planning documents can provide greater detail to show income and poverty impacts, especially for low-income and working-class populations, who may be harder to reach for community surveys. This information is stronger if it can be combined with ACS data like in points (1) and (2).
Next Steps for Designations
Governors and State Economic and Community Development leaders have been on notice that Opportunity Zone designations would be coming since the passage of the OBBBA last summer. This guidance offers clarification and processes but does not change the fundamentals behind the value of Opportunity Zones. Given the timeframe, states should begin the process of soliciting input from other stakeholders over the course of the next 60 days, so that they can begin their internal review process.
Communities and developers should be building the case for their critical census tracts, based on what we have learned from previous Opportunity Zone investments.
- Identify the project pipeline where investments are anticipated to take place over the next several years.
- Communities need to build the case for how OZ designation can stimulate investment and development in those areas of the community and beyond
- Developers should examine the impact of their investments and be prepared to demonstrate how an OZ designation can move projects off the drawing board and into the ground.
- Rural communities and developers should pay attention to the extra benefits of OZ 2.0 and focus on high-impact projects or districts where the extra benefits can drive the needed capital infusion
- Public entities should examine their infrastructure pipelines and build the case around how current and future public investment can set the stage for private development in the near future, and the role that OZ designation can play to accelerate development.
As interested parties wait to hear how states will review and select census tracts, focusing on these five points will help them be prepared to make the strongest cases for their projects and communities. To discuss Opportunity Zone 2.0 planning, contact KJK’s Director of Economic Development & Incentives practice group David Ebersole at DME@kjk.com.