IRS Notice 2026-40 – Significant Opportunity Zone transitional guidance

The IRS recently released Notice 2026-40, which announces that Treasury and the IRS intend to publish proposed regulations on qualified opportunity zones (OZ) under Internal Revenue Code sections 1400Z-1 and 1400Z-2, as amended by the One Big Beautiful Bill Act (OBBBA). The proposed regulations will create transitional guidance to implement the various OBBBA provisions. Most of the guidance in the Notice is not surprising, e.g., previously deferred gains recognized on Dec. 31, 2026, are not eligible for further investment. The proposed transitional guidance for qualified opportunity funds (QOFs) and qualified opportunity zones business property (QOZBP), however, was not anticipated, and would significantly restrict the ability to invest in an “OZ 1.0 Zone” after Dec. 31, 2026.

The OBBBA created decennial OZ designations, under which the second set of opportunity zones will be in effect on Jan. 1, 2027 (OZ 2.0 Zones). OZ 1.0 zones, which were created under the Tax Cuts and Jobs Act, do not expire until Dec. 31, 2028. Thus, both OZ 1.0 Zones and OZ 2.0 Zones will be in effect for the 2027 and 2028 calendar years.

The Notice indicates that property cannot be QOZBP unless either (a) it was acquired in an opportunity zone that is designated after July 4, 2025, (i.e., the date of the OBBBA); or (b) the following exception applies:

1. A working capital safe harbor plan has been adopted with respect to the QOZBP before Dec. 31, 2026;
2. The QOZB or QOF receives at least 10% of the working capital prior to Dec. 31, 2026; and
3. At least 5% of the working capital assets are spent prior to Dec. 31, 2026.

Because OZ 1.0 Zones were not created after July 4, 2025, QOZBP can exist in an OZ 1.0 Zone using the exception above. Before the end of this year, any OZ 1.0 Zone projects should develop a working capital plan and implement the above-listed capital requirements.

It should be noted that the Notice serves as subregulatory guidance and establishes an intent to issue proposed regulations. The proposed regulations will solicit feedback and could be changed before the issuance of final regulations.

If the QOZBP transitional guidance becomes final, then careful planning will be required for any OZ 1.0 Zone projects in 2027 and 2028. Specifically, developers will be required to document a working capital plan and receive and deploy meaningful capital before Jan. 1, 2027.

Baker Tilly’s National Tax specialists will continue to monitor this regulatory process. Subscribe to our email communications and receive updates directly to your inbox.

If you have questions about how the above may impact your tax situation, reach out to your Baker Tilly tax advisor.