By Andrew Prystai
2025 will be a pivotal year for startups and tax policy, and one instrumental program that has been crucial to the success of the company I co-founded, Event Vesta Inc, is at risk of sunsetting. The opportunity zone (OZ) program, established by Congress through the Tax Cuts and Jobs Act of 2017 to drive business creation, growth, and investment to qualified undercapitalized communities across the United States, expires at the end of 2026. Without Congressional action, startups in developing regions that depend on this program and the investment it brings are at risk.
I know first hand the impact the opportunity zone program can have for startups. Without it, I can confidently say Event Vesta Inc would not exist today. As an events-focused platform that started in 2019 in Omaha, Nebraska, trying to build a high growth tech company in a predominantly rural state was already going to be a tough challenge in the best of times, as the Midwest raised only .5% of all Venture Capital in 2018. But it became almost impossible with the onset of the pandemic.
While we were able to pivot our business model to support digital and outdoor events and draw some support from the Paycheck Protection Program, these were not enough to sustain the company through the pandemic’s toughest months and left our outlook bleak. But in late 2020 our largest investor and board member located in the Hinge Opportunity Zone in Ralston was looking to make OZ investments and was impressed with our team and our work to survive a difficult economic period. Unequivocally, our investors would not have invested in us without the incentives they received through the OZ program, and they ultimately proved to be our lifeline.
Event Vesta Inc is an example of opportunity zones succeeding — we’ve hired over 10 employees throughout our history, raised over $1 million in venture capital, went through a Techstars program, won the 2021 Omaha Tech Startup of the Year, and have expanded to promote events in more than 200 cities across the U.S.
The opportunity zone program directs investment to startups and real estate by offering significant benefits to investors. The program allows investors experiencing a capital gains event to reinvest those gains in a qualifying opportunity fund located in an opportunity zone — a designation given to communities across the country with the goal of revitalization — which are then invested in a qualifying opportunity property.
As an incentive to invest, investors are able to defer capital gains taxes on the invested funds. In order to be eligible for this tax benefit, the investor must invest their qualifying funds within 180 days of the gain event. While the investor may also invest further funds, only funds related to the capital gain are eligible for the tax benefits. Tax on invested gains can be deferred until December 31, 2026, or until the investor sells their stake in the investment.
The program is also structured to encourage longer-term investments. Investors receive a step up in basis of 10% for an investment of five years and 15% for an investment of seven years. This means to take full advantage of the associated tax benefits, investors will have had to reach the five or seven year holding period benchmarks by 2026. So if investors want to avail themselves of the step up in basis, they would have had to invest by the end of 2021. Perhaps most significantly, investors who keep their investments in opportunity funds for at least 10 years are eligible to avoid paying capital gains taxes on anything they earn beyond their initial investment.
This program doesn’t just benefit companies like ours and investors, but it helps the OZ communities too. Ralston City Administrator Rick Hoppe told me that, thanks to the designation, the area has witnessed startups transform into profitable businesses and now has “50 high-paying jobs in an 88,000 square foot commercial retail center anchored by the public-private Granary Green, an outdoor community gathering space.” The area has seen hundreds of residential units developed, with new commercial buildings in planning stages. Moreover, “the EOZ designation has led to over $160 million in private sector investment in Ralston, a huge economic boon for a small Nebraska community.”
As for my company, we continue to be located in the Hinge opportunity zone because the OZ program has created an ecosystem that helps us thrive and attract top talent.
For these reasons it is crucial Congress continues to support this program for our continued success and for countless other startups which can, and do benefit from investment as OZ businesses. But there is also room for reform — right now, all of the direct incentives associated with opportunity zones are for the investors. And while these incentives are crucial — they help drive needed funds to promising startups — Congress could do more to incentivize businesses to launch in or relocate to OZs, even without requiring outside investment.
For example, policymakers could provide the same opportunity zone capital gains benefit that applies to selling our company to other equity holders like founders and employees with common stock, as currently the capital gains benefits upon sale of an OZ business are only applicable to OZ investors. They could also explore introducing other tax credits, especially refundable tax credits, that provide working capital to the businesses in the OZs as they continue growing jobs and investing in those areas.
These incentives would encourage investment in activities other than real estate. As reported by the Economic Innovation Group, most OZ investments have been directed to real estate and the reporting on OZ investments annually is focused primarily on property and assets in the OZ as opposed to measuring job creation or growth. Policymakers should explore measuring the activity happening in an opportunity zone — for example, reporting on wages spent, revenue generated, and jobs created — and incent those activities that reward businesses for succeeding. We can look to state-based programs as examples of success. For example, the Nebraska Microenterprise tax credit provides incentives to SMBs based on an increase in employment. Something similar at the federal level could drive new employment to the zones because of their designation, which would lead to high wage, high value jobs.
To encourage further investor engagement, tax writers can also explore a reform to the eligible investment window. It is a challenge to raise capital from investors who are in their 180 day window after a capital gains event — the stars have to align between investors with a qualifying event that have the knowledge and ability to invest in a qualifying opportunity fund, and a qualifying startup in the midst of fundraising. We were lucky — our investor had a recent capital gains event and we were also raising money. But, if the window had been longer, I believe we could have received more OZ investment. Additionally for startups like Event Vesta Inc, exits may happen sooner than the holding windows. Ensuring investors have proper time to find new OZ opportunities and re-invest these funds in other OZ businesses would help avoid misalignments between a company’s fiduciary responsibility to return their shareholders capital and an individual investor’s incentive to keep their funds in an OZ business.
Finally policymakers should also examine the step up in basis for previously earned capital gains that are invested in OZ businesses. Because investors had to invest by the end of 2021 to be eligible for this incentive, many investors have since shied away from investing in opportunity zones. Instead, policymakers should explore ways for investors to still qualify for the program’s relevant holding periods and associated tax benefits if an investment is made after 2021.
Tax writers need to hear from startups impacted by the opportunity zone program — and startups need to know about how they can benefit from it as well. But without Congressional action soon, OZs will sunset and innovation will lag, to the detriment of dozens of communities and businesses like ours that rely on programs like the opportunity zone program to exist and thrive.
Engine is a non-profit technology policy, research, and advocacy organization that bridges the gap between policymakers and startups. Engine works with government and a community of thousands of high-technology, growth-oriented startups across the nation to support the development of technology entrepreneurship through economic research, policy analysis, and advocacy on local and national issues.
