From RIA Newsstand 12/19/05 and 12/22/05 : On Dec. 21, President Bush at a White House ceremony signed H.R. 4440 into law as the "Gulf Opportunity Zone Act of 2005".
RIA observation: Despite its title, the Act is not limited to tax provisions that encourage rebuilding of the areas ravaged by Hurricanes Katrina, Rita and Wilma. It also includes provisions from H.R. 4388, the House-approved Tax Revision Act of 2005, including the extension of a special rule allowing military personnel the option of including their tax-free combat pay when computing their eligibility for the Earned Income Credit (EIC). And one-half of the Act consists of technical corrections (some substantive, some clerical) to a number of earlier laws, including the Energy Policy Act of 2005, the American Jobs Creation Act of 2004, and the Jobs and Growth Tax Relief Reconciliation Act of 2003.
What follows is a brief overview of the non-technical-corrections portion of the Act. Watch for more details to be issued by RIA in the form of a Special Study entitled "Highlights of the Gulf Opportunity Zone Act of 2005" along with "RIA's Complete Analysis of the Gulf Opportunity Zone Act of 2005." These publications will be accessible online by Checkpoint subscribers soon.
Which Areas Receive Aid?
The Act provides targeted relief to the following areas:
Capital Cost Recovery Provisions
Bonus 50% first-year depreciation allowance. The Act OKs a bonus first year depreciation allowance similar to the one that was enacted after the terrorist attacks of Sept. 11, 2001. It provides a 50% bonus fist-year depreciation allowance to help businesses rebuild in the GO Zone. Businesses get the bonus writeoff for the cost of most new property investments made in the GO Zone, including purchased computer software, leasehold improvements, certain commercial and residential real estate expenses, machinery, and equipment. All depreciation deductions (including bonus depreciation) for property qualifying for the bonus first-year writeoff are exempt from the AMT. The 50% bonus depreciation allowance applies to property acquired after Aug. 27, 2005, and placed in service before Jan. 1, 2008 (before Jan. 1, 2009 for real property). In addition IRS is granted the authority to extend to no later than Dec. 31, 2006, the pre-Act law bonus depreciation extended placed-in-service date for certain property (from Dec. 31, 2005), on a case-by-case basis. The authority extends only to property placed in service or manufactured in the GO Zone, the Rita GO Zone, or the Wilma GO Zone. In addition, the authority extends only to circumstances in which the taxpayer was unable to meet the Dec. 31, 2005 deadline as a result of Hurricanes Katrina, Rita, and/or Wilma. Increased expensing. The Act boosts the maximum expensing allowance for the tax year by the lesser of (1) $100,000, or (2) the cost of qualified section 179 GO Zone property placed in service during the tax year. Additionally, the point at which the expensing allowance begins to phase out because of large purchases of expensing-eligible property increases by the lesser of (1) $600,000 or (2) the cost of qualified section 179 Gulf Opportunity Zone property placed in service during the tax year. These changes apply for property placed in service in the Gulf Opportunity Zone after Aug. 27, 2005 and before Jan. 1, 2007. Who's eligible for bonus depreciation and boosted expensing. The Act's provisions relating to additional first-year depreciation and increased expensing (as well as the five-year carryback of NOLs attributable to casualty losses, depreciation, or amortization, covered below), don't apply to any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises. Additionally, these provisions also do not apply to (1) any property used directly in connection with gambling, animal racing, or the on-site viewing of such racing, and (2) buildings or portions of buildings dedicated to these activities (unless the portion so dedicated is less than 100 square feet). Partial expensing for demolition and cleanup costs. Under current law, no deduction is allowed to the owner or lessee of a building for any loss on demolition of the building, or for any of the demolition expenses. The loss or expenses must be capitalized and added to the basis of the land. Under the Act, effective for amounts paid or incurred after Aug. 27, 2005 and before Jan. 1, 2007, 50% of the costs (that would otherwise be capitalized) related to site cleanup and demolition are deductible. The expenses must relate to property in the GO Zone held by the taxpayer for use in a trade or business or for production of income, or inventory held primarily for sale to customers in the ordinary course of business. Expensing of brownfields remediation extended for two years. Under pre-Act law, for expenses paid or incurred before 2006, taxpayers may elect to treat qualified environmental remediation expenses that would otherwise be chargeable to capital account as deductible in the year paid or incurred. A qualified environmental remediation expense must be paid or incurred in connection with the abatement or control of hazardous substances at a qualified contaminated site. The Act permits expensing of qualified remediation expenses paid or incurred before Jan. 1, 2008, in connection with a qualified contaminated site located in the GO Zone. The extension applies to qualifying remediation expenses paid or incurred after Aug. 27, 2005. Additionally, the Act permits the cleanup of petroleum products in the GO Zone to be treated as a qualified remediation expense. Boosted expensing for timber growers. Under pre-Act law, effective for expenses paid or incurred after Oct. 22, 2004, taxpayers other than trusts and estates may elect to deduct up to $10,000 ($5,000 if married filing separately) of reforestation costs, and taxpayers (including estates but not trusts) may elect to amortize the balance of reforestation costs over 84 months. (Code Sec. 194) Effective for expenses incurred after Aug. 27, 2005, and before Jan. 1, 2008, the Act increases the maximum reforestation amount that a taxpayer may elect to expense by the lesser of: (1) $10,000 ($5,000 if married filing separately); or (2) the amount of reforestation expenses paid or incurred by the taxpayer with respect to qualified timber property during the specified portion of the tax year. The increase applies only for qualified timber property any portion of which is located in (1) the GO Zone, in that portion of the Rita GO Zone which is not part of the GO Zone, or in the Wilma GO Zone. The boosted expensing amount does not apply to (1) publicly traded corporations, (2) real estate investment trusts, or (3) taxpayers that hold more than 500 acres of qualified timber property at any time during the tax year.
5-year NOL carryback. The Act provides for a special five-year carryback period (instead of two years) for NOLs to the extent of certain specified amounts related to the GO Zone. The amount of the NOL which is eligible for the five year carryback is limited to the aggregate amount of the following deductions:
- qualified GO Zone casualty losses;
certain moving expenses;
certain temporary housing expenses;
depreciation deductions for qualified GO Zone property for the tax year the property is placed in service; and
- deductions for certain repair expenses resulting from Hurricane Katrina.
The 5-year carryback applies for losses paid or incurred after Aug. 27, 2005, and before Jan.1, 2008; however, an irrevocable election not to apply the five-year carryback may be made for any tax year. Five-year carryback for small timber producers. The Go Zone Act includes a 5-year (instead of a 2-year) NOL carryback period for taxpayers owning less than 500 acres of timber in the Katrina (effective on 8/27/05), Rita (effective on 9/23/05), and Wilma (effective on 10/23/05) Zones. The taxpayer can't be a publicly traded corporation or a real estate investment trust. 10-year elective carryback for public utilities. Effective for losses arising in tax years ending on or after Aug. 28, 2005, the Go Zone Act permits taxpayers with casualty losses associated with public utility property caused by Hurricane Katrina to elect to a 10-year carryback of a net operating loss attributable to certain casualty losses.
Tax Credit Changes
Increase in rehabilitation credit for Gulf Opportunity Zone projects. Under pre-Act law, the tax credit for rehabilitating a building is 10% (20% for a certified historic structure) of the qualified rehabilitation expenditure. A rehabilitated building (other than a certified historic structure) is eligible for the credit only if the building was first placed in service before '36. The Act raises the rehabilitation credit from 10% to 13% of qualified expenditures for any qualified rehabilitated building other than a certified historic structure. It also raises the rehabilitation credit from 20% to 26% of qualified expenses for any certified historic structure. The increases apply only to eligible buildings located in the GO Zone, and only for qualified rehabilitation expenses paid or incurred after Aug. 27, 2005, and before Jan. 1, 2009. Employee retention credit broadened. KETRA (the Katrina Emergency Tax Relief Act of 2005, P.L. 109-73) provided a 40% tax credit for wages paid up to $6,000 if paid after Aug. 28, 2005, and before Dec. 31, 2005, by eligible employers. An eligible employer is one: (1) that conducted an active trade or business on Aug. 28, 2005 in a Hurricane Katrina core disaster area (defined in the same way as the GO Zone area), and (2) for whom this trade or business is inoperable on any day after Aug. 28, 2005 and before Jan. 1, 2006, because of damage sustained from Hurricane Katrina. An eligible employer doesn't include any trade or business for any tax year if it employed an average of more than 200 employees on business days during the tax year. The Act modifies the employee retention tax credit so that it applies to the Katrina, Rita and Wilma Zones without regard to the size of the employer. Employer tax credit pegged to employee exclusion for employer-provided housing. The Act permits employees to exclude from gross income up to $600 per month for lodging provided their employer located in the GO Zone. Employers providing such housing are entitled to a credit equal to 30% of the amount which is excludable from the gross income of qualified employees. These changes apply to lodging provided beginning on the first day of the first month beginning after the date of enactment and ending on the date which is 6 months after that date. Expanded higher-education credits. Under current law, taxpayers may claim a Hope Scholarship Credit in the first two years of postsecondary education equal to 100%% of the first $1,000 of qualified tuition and related expenses, plus 50% of the next $1,000 for a maximum of $1,500. A Lifetime Learning Credit also is available to students enrolled in one or more courses at the undergraduate or graduate level (whether or not pursuing a degree), equal to 20% of the first $10,000 in qualified tuition and related expenses. The Act doubles the Hope Credit dollar amounts so that the maximum credit is $3,000, and doubles the Lifetime Learning Credit percentage from 20% to 40%, for a maximum Lifetime Learning Credit of $4,000 for students. The boosted amounts apply only for the 2005 and 2006 tax years for students attending undergraduate or graduate institutions in the GO Zone. Room and board, books and fees also are treated as qualified expenses. for purposes of the higher-education credits. New markets tax credit. A NMTC (new markets tax credit) allows businesses investing in low-income communities lacking access to capital to take a 39% tax credit over seven years for investments in qualified community development entities (CDEs). The Go Zone Act permits an additional $300 million in 2005 and 2006 and an additional $400 million in 2007 for NMTC authority for CDEs operating in the GO Zone.
KETRA Provisions Extended to Victims of Hurricanes Rita and Wilma
KETRA provided a package of income tax relief provisions to help victims of Hurricane Katrina. The Go Zone Act extends the following KETRA income tax relief measures to Hurricanes Rita and Wilma as well: Early withdrawals from retirement plans. The 10% penalty tax for premature distributions from IRAs and qualified retirement plans is waived for individuals who suffered an economic loss because of Rita or Wilma and whose principal residence is located in the Rita or Wilma disaster areas. Individuals eligible for this waiver may pay income tax on such distributions ratably over a three-year period. Amounts distributed may be re-contributed to a qualified retirement plan over the three-year period following the distribution date and receive rollover treatment. The waiver of the 10% penalty, 3-year income averaging and recontribution provisions for retirement plan withdrawals are limited to $100,000 per individual. Distributions for home purchases which were not finalized because of Hurricanes Rita or Wilma also may be re-contributed to a qualified retirement plan or IRA. Eased qualified plan loan limits. The limits on the amount of loans that may be withdrawn from qualified employer plans without paying a current tax are increased for Hurricane Rita and Hurricane Wilma victims by doubling the thresholds to the lesser of $100,000 or 100% of the individual's account balance. Additionally, payments due from hurricane victims on qualified plan loans on or after Aug. 25, 20 and before Jan.1, 2007, may be deferred, and twelve months may be added to the maximum repayment period of affected loans. Corporate charitable Contributions relief for Hurricanes Rita and Wilma. The rule limiting a corporation's deductible charitable deduction in any tax year to 10%% of the corporation's taxable income is temporarily waived for charitable cash contributions for Rita and Wilma relief. Eased casualty loss rules. The 10% of AGI and $100 floors for casualty losses are waived for losses resulting from Hurricanes Rita (after 9/23/05) or Wilma (after 10/23/05) and incurred in the disaster area, including those claimed on amended returns.
Other Act Changes