Opportunity Zones (OZs) were created by the Tax Cuts and Jobs Act of 2017 to spur economic development in distressed communities through tax incentives for private investment. For manufacturers—especially those pursuing defense contracts—OZs offer a powerful combination of tax benefits and strategic positioning that can significantly reduce the cost of expansion and new facility development.
Understanding Opportunity Zones
What Are Opportunity Zones?
OZs are designated census tracts where new investments may be eligible for preferential tax treatment. There are approximately 8,764 designated OZs across all 50 states, the District of Columbia, and U.S. territories.
The Tax Benefits
1. Capital Gains Deferral
Invest capital gains into a Qualified Opportunity Fund (QOF)Defer tax on the original gain until December 31, 2026, or when the investment is sold
2. Step-Up in Basis
If held for 5+ years: 10% exclusion of deferred gainIf held for 7+ years: Additional 5% exclusion (15% total)Note: The 7-year benefit window has largely passed for new investments
3. Permanent Exclusion of New Gains
If the OZ investment is held for 10+ yearsAll appreciation — on the OZ investment is tax-freeThis is the most powerful benefit for long-term manufacturing investments
Example: Manufacturing Facility Investment
| Scenario | Without OZ | With OZ (10+ years) |
|----------|-----------|---------------------|
| Initial capital gain | $2,000,000 | $2,000,000 |
| Investment in facility | $2,000,000 | $2,000,000 |
| Facility value after 10 years | $5,000,000 | $5,000,000 |
| Tax on original gain | $476,000 | $476,000 (deferred) |
| Tax on appreciation ($3M) | $714,000 | $0 |
| Total tax savings | — | $714,000 |
Why Manufacturing + Opportunity Zones Is a Winning Combination
1. Lower Facility Costs
OZ-designated areas often have:
Lower real estate pricesAvailable industrial land and buildingsReduced competition for sitesLocal government incentives stacked on top of OZ benefits
2. Workforce Availability
Many OZ communities have:
Available labor force seeking manufacturing jobsCommunity colleges and trade schools nearbyWorkforce development programs and grantsLower cost of living (attracting and retaining workers)
3. Community Impact
Manufacturing in OZs creates:
High-quality jobs in underserved communitiesLocal economic multiplier effectsTax revenue for local governmentsSkills development and career pathways
4. Stacking Incentives
OZ benefits can be combined with:
Federal tax credits (R&D, energy efficiency)State tax incentives (job creation, equipment)Local property tax abatementsNew Markets Tax CreditsHUBZone certification (many OZs overlap with HUBZones)
Finding the Right Opportunity Zone
Research Tools
Treasury Department OZ Map — Official designation mapCDFI Fund OZ Resources — Data and toolsState economic development agencies — Local OZ informationCoStar and LoopNet — Commercial real estate in OZs
What to Look For
Infrastructure — Roads, utilities, broadband accessWorkforce — Available labor with relevant skillsSupply chain proximity — Near customers and suppliersZoning — Industrial zoning or ability to rezoneIncentive stacking — Additional state and local benefitsCommunity support — Local government and community buy-in
Structuring Your OZ Investment
Qualified Opportunity Fund (QOF)
To receive OZ tax benefits, investments must be made through a QOF:
Organized as a corporation or partnershipSelf-certified by filing IRS Form 8996Must hold at least 90% of assets in OZ propertyCan be a single-asset fund for your manufacturing facility
Qualified Opportunity Zone Business Property (QOZBP)
Your manufacturing facility qualifies if:
Acquired by purchase after December 31, 2017Original use begins with the QOF, OR the property is substantially improvedSubstantially all use is in an OZUsed in a trade or business
Substantial Improvement Test
For existing buildings:
Must invest more than the purchase price in improvementsWithin 30 months of acquisitionLand value is excluded from the calculation
Defense Manufacturing in Opportunity Zones
Strategic Advantages
HUBZone overlap — Many OZs are also HUBZones, qualifying for set-aside contractsWorkforce development — DoD values job creation in underserved communitiesCost advantage — Lower operating costs improve contract competitivenessCommunity impact — Positive narrative for proposals and past performance
Case Study Concept
A small manufacturer invests $3 million in a new CNC machining facility in an Opportunity Zone that's also a HUBZone:
OZ tax benefit: — $0 tax on facility appreciation over 10 yearsHUBZone benefit: — Access to HUBZone set-aside contractsLower costs: — 20-30% lower real estate and labor costsCommunity impact: — 30 new manufacturing jobs in an underserved areaDefense contracts: — Competitive pricing due to lower cost structure
Risks and Considerations
Investment timeline — 10-year hold required for maximum benefitLocation constraints — Must be in a designated OZRegulatory complexity — QOF rules are detailed and evolvingCommunity dynamics — Ensure your business is welcomedInfrastructure gaps — Some OZs lack adequate infrastructureTax law changes — Future legislation could modify benefits
Getting Started
Consult a tax advisor experienced in OZ investmentsResearch OZ locations that align with your manufacturing needsEvaluate incentive stacking opportunitiesDevelop a business plan that incorporates OZ benefitsStructure your investment through a QOFEngage with local communities and economic development agenciesConnect with KDM & Associates for defense contracting integration
Conclusion
Opportunity Zones offer a rare alignment of tax incentives, community impact, and business strategy for manufacturers. When combined with defense contracting opportunities and programs like HUBZone, the benefits multiply. For manufacturers willing to invest in underserved communities, OZs can significantly reduce costs while creating meaningful economic impact.
Ready to Take the Next Step?
Whether you're a small manufacturer seeking defense contracts, a government buyer looking for qualified suppliers, or a business owner pursuing CMMC certification, KDM & Associates and the V+KDM Consortium are here to help.
Join the KDM Consortium Platform today:
Schedule a free introductory session to learn how we can accelerate your path to government contracting success.
Whether you're a small manufacturer seeking defense contracts, a government buyer looking for qualified suppliers, or a business owner pursuing CMMC certification, KDM & Associates and the V+KDM Consortium are here to help.
Join the KDM Consortium Platform today:
[Register as a Supplier (SME)](/register?type=sme) — Get matched with government contract opportunities, access capacity-building resources, and connect with prime contractors.[Register as a Government Buyer](/register?type=buyer) — Discover qualified, defense-ready small businesses and streamline your procurement process.
*Schedule a free introductory session to learn how we can accelerate your path to government contracting success.*
