Tax professionals who serve rural communities now have fresh opportunities to guide clients into new investment incentives. With the release of Notice 2025-50, the Treasury Department and IRS clarified rules under the One Big Beautiful Bill Act (OBBBA) for qualified opportunity zone (QOZ) investments in rural areas, now referred to as qualified rural opportunity zones (QROZs).

Here’s why this matters: For the first time, we have a clear federal definition of “rural area” for QOZ purposes, along with a new, more achievable substantial improvement test for properties located in those areas. This means practitioners have brand new ways to help clients access tax benefits tied to community development.

How is a rural area defined for QROZs?

Under the OBBBA rules, an area is considered rural if:

• It’s not a city or town with a population greater than 50,000, and
• It’s not part of an urbanized area contiguous or adjacent to such a city or town.

Put simply, most smaller towns and their surrounding areas qualify as QROZs. This definition removes the uncertainty that previously stalled investment discussions, giving practitioners a clear test for whether clients’ property is eligible.

Practice note: The population thresholds for rural areas are tied to census data. However, some areas on the “edge” of larger cities may appear to qualify but might be too close to a larger urban center, disqualifying them. Since the “adjacent urban area” rule can be a bit tricky, it’s important that practitioners confirm eligibility by checking if the property meets the official rural area definition before advising clients. This ensures the property truly qualifies as part of a QROZ under the new rules, as the definition may vary depending on specific geographic boundaries and census data updates.

For more background on the evolution of these rules, see Notice 2018-48, which originally listed the QOZ designations.

Substantial improvement threshold now lowered for QROZs

Originally, to qualify as “substantially improved,” an existing building in a QOZ had to receive improvements that exceeded 100% of its adjusted basis (excluding land). For example, if a fund acquired a building with a $400,000 basis, it had to spend more than $400,000 on improvements.

Under the new rural rules for QROZs:

• That threshold is cut in half; improvements need only exceed 50% of adjusted basis.
  • Using the same example: for a $400,000 building in a QROZ, only $200,000 of improvements are needed to qualify.
• This lower bar makes rehabilitation and renovation of older rural properties much more feasible.

Here’s a quick comparison:

Test	Standard QOZ (Old Rule)	QROZ (New Rule)
Improvement threshold	>100% of adjusted basis	>50% of adjusted basis
Example (basis = $400,000)	Must invest >$400,000	Must invest >$200,000

Practice note: The rule still excludes land from the basis, and improvements must be made within the required time frame (generally 30 months). Regular maintenance (e.g., routine repairs, painting or standard upkeep) does not qualify as an improvement under the substantial improvement test.

How QROZs open opportunities for your clients

Many small businesses, farms and entrepreneurs in rural towns may not realize they now qualify for QOZ incentives in QROZs. These rules give practitioners a tool to bring immediate value:

• Educate clients who own or plan to buy property in rural opportunity zones.
• Evaluate projects that previously didn’t meet the substantial improvement test but may qualify under the new rules.
• Guide investors by identifying eligible QROZ properties, helping them navigate the improved substantial improvement thresholds, and advising on the best ways to maximize tax savings through community-focused projects, such as revitalizing existing properties or developing new businesses in rural areas.

Fresh QROZ action steps for practitioners

1. Review your client list for businesses or individuals with rural property holdings.
2. Check property locations against the updated rural definition to confirm eligibility.
3. Discuss renovations or expansions with clients who may now pass the substantial improvement test at a lower cost.
4. Monitor state-level incentives, since some states may follow the federal lead with their own rural programs.

Further QROZ client discussion points

This guidance opens doors for new conversations. If you work with clients in construction, farming, hospitality or main street retail, now is the time to ask whether they’ve considered reinvesting in their community through a rural QOZ (or QROZ) project. Even modest upgrades, like renovating an older building into mixed-use space or expanding a family-owned business facility, may now qualify under the 50% improvement threshold.

The OBBBA also introduced the qualified rural opportunity fund (QROF), which functions like a traditional QOZ fund but specifically targets rural investments. This means investors can pool resources and still receive enhanced tax benefits, making rural projects more competitive.

By identifying eligible clients early, you help them unlock tax savings and position yourself as their go-to advisor for a brand-new incentive that many practitioners have yet to explore.

QROZ Notice 2025-50 recap

This is a first-of-its-kind development for rural QOZ investments. With clear definitions and a lower improvement threshold, practitioners now have fresh tools to help clients maximize benefits and spur economic growth in underserved areas.

Stay ahead of the curve. NATP members get timely updates, practical education and resources to guide clients through new tax developments like this one. Join NATP today and turn opportunity into advantage for your practice.

For additional details, view the official IRS releases:

• Treasury, IRS provide guidance for Opportunity Zone investments in rural areas
• Notice 2025-50 full text
• Notice 2018-48 original QOZ designation list

Question: Jennifer’s 80-year-old father, Robert Jorgensen, lives alone in his home. He qualifies as Jennifer’s medical dependent since he would be her tax dependent (qualifying relative) except for the gross income test ($5,200 for 2025). To help Robert age in place, Jennifer paid for the installation of a stair lift ($3,000) and a zero-threshold shower ($9,500). Medically necessary improvements to a home qualify as itemized medical deductions, provided they don’t increase the home’s fair market value (FMV). If they do, then the expense is reduced by the increase to FMV. While the stair lift does not usually increase basis, the zero-threshold shower adds $2,000 to the value of Robert’s home. What is Jennifer’s allowable deduction for Robert’s improvements on her Schedule A, Itemized Deductions (1040)?

Answer: Jennifer’s deduction on Schedule A is limited to the cost of the stair lift, $3,000, plus only part of the cost of the zero-threshold shower that did not increase the FMV of the home. The deductible amount of a medical improvement on Schedule A is the cost minus any increase in the property’s FMV due to the improvement [Reg § 1.213-1(e)(1)(iii)]. In this case, Jennifer will deduct only $7,500, or ($9,500 - $2,000). Her total deduction will be ($3,000 + $7,500) for a total Schedule A deduction of $10,500.

Additionally, $2,000 of the $9,500 zero-threshold shower will be added to the cost basis of Robert’s home, rather than being deducted on Jennifer’s Schedule A.

As of Oct. 8, 2025, the IRS has activated its fiscal year 2026 Lapsed Appropriations Contingency Plan, since Congress has not yet passed annual funding legislation. The updated plan covers an extended lapse scenario through April 2026, should the funding gap persists until then. Past shutdowns (such as the 2018-2019 lapse) caused major disruptions, including refund delays, suspended audits and a backlog that took months to clear. The new plan seeks to minimize any similar impacts by prioritizing life, property and data protection during this funding lapse. Here’s a breakdown of the plan.

Workforce management and exempt vs furloughed employees

Out of ~74,299 employees (as of July 2025), 39,870 (53.6 %) will continue working. The remainder of the employees will be furloughed until funding is provided to resume normal operations. To be considered necessary (deemed “exempt” or “excepted”), employees must:

• Already be funded by multi-year or no-year appropriations (i.e., not dependent on annual appropriations) 
• Maintain activities “authorized by law,” even in a lapse context 
• Provide functions necessary to safeguard life or property (with a strict standard) 
• Complete tasks necessary to effect an orderly shutdown and to protect government property or data

Activities that continue under the plan

The plan distinguishes services under specific categories (A, B, C) for exempt or exception-based continuation:

Category A1 (funded by nonexpiring funds/legally allowed)

• Certain taxpayer verification services (e.g., the Income Verification Express Service (IVES)) 
• Issuance of Form 6166, Certification of U.S. tax residency
• Some contract work, modernization efforts and tasks tied to legislated mandates (e.g., P.L. 119-21 / OBBBA) 
• Essential services connected to other agencies (Social Security, OPM) Category B (“safety of life/protection of government property”)
• Processing remittances and tax return payments, to protect those funds as government property
• Computer operations to prevent data loss, protecting infrastructure 
• Mail processing for remittances, disaster relief transcripts, etc.
• Protection of statutes of limitations, liens, seizures (i.e., preserving legal rights)

Category C (shutdown transition/“close down” operations)

• Finalizing and storing records, inventories, securing work in progress 
• Processing notices of furlough, performing shutdown-specific administrative tasks

Activities that cease

Many IRS functions outside the core “excepted” operations are suspended, including:

• Routine taxpayer assistance (e.g., answering general taxpayer inquiries, call centers) outside of filing season or emergencies
• Collections that are non-automated (manual enforcement)
• Legal counsel for non-excepted functions
• Research, training, long-term planning, IT enhancements outside of core mission or necessary to protect property/data
• Certain procurement, contract initiation and administrative overhead not tightly tied to exempt functions

How this plan affects taxpayers and tax professionals

Impact area	Effects and disruptions	Duration and severity notes
Customer support	Most non-emergency services are suspended; taxpayers are unable to get direct answers	During the entire lapse period (unless a function is “excepted”)
Processing non-remittance tax returns	Returns without payments aren’t processed; refund issuance is delayed	Until funding returns
Tax payments and remittances	The IRS will continue processing payments	This is one of the higher-priority excepted functions
Collections/ enforcement and audits	Non-automated collections and many audit activities are suspended	Could backlog significantly
Legal motions, litigation, appeals	Only those with imminent deadlines (“excepted” positions) will proceed; routine legal activity stalls	Time-sensitive matters are prioritized; others delayed
IT systems, modernization, digital services	Only minimal system maintenance to prevent data loss will continue; no new enhancements or non-essential updates	Innovation and upgrades paused
Tax professional support/publications/rulings/guidance	Less new guidance, fewer rulings, slow responses	Longer wait for responses and interpretation support
Filing season preparation and forms	Some tasks (designing, printing forms, testing) will continue if necessary to protect the upcoming filing season, but many supporting operations will slow	Risk to timely readiness for next filing season
Disaster tax relief/emergency assistance	Some disaster-relief tax services are designated to continue under “excepted” status, with limitations	For areas under disaster declarations, some continuity may remain
Statute and legal protection	The IRS will continue operations that preserve taxpayer or government rights (statutes of limitations, liens, etc.)	Prevents “clock running out” on enforcement rights

Key takeaways for October deadlines

Deadlines still apply during the shutdown, and statutory due dates remain unchanged. (See §6151, §6072, CFR 1.6072-1) This means the Oct. 15 filing deadline for individuals on extension remains in full effect even if IRS operations slow. The same is true for payment due dates. Interest and penalties will still accrue if a balance is due with the return. There is no automatic grace period or postponement unless Congress should enact any legislation or the IRS formally announces any relief (to date, neither has happened nor is pending).

Let clients know they should file and pay as usual. Clients should submit payments online and avoid mailing checks that could get stuck in a backlog. Remind clients to document everything and to keep proof of timely e-filing and payment.

After the government shutdown ends

Once appropriations are restored, all furloughed employees will be recalled to work. Under the plan, the IRS will notify employees via hotline, internal websites, call trees, etc. Employees are expected to report within four hours on a scheduled workday, or on the next scheduled workday if recall happens off schedule. During reactivation, management may permit telework or liberal leave as needed to facilitate a smooth transition.