Gulf Opportunity ZonesThe special tax laws passed after the 2005 hurricanes created a new business income tax credit for eligible employers who continued to pay employees during any period their business was inoperable between Aug. 27 and Dec. 31, 2005, as a result of damage sustained from hurricanes Katrina, Rita or Wilma.
The credit is not affected if the employee reported to work at another location while the business was inoperable, or even if the employee did not work at all but was still kept on the payroll.
An "eligible employer" is defined as any employer conducting an active trade or business on Aug. 28, 2005, for the Katrina GO Zone, or on Sept. 23, 2005, for the Rita GO Zone, whose business became inoperable on any date between Aug. 28 (for Katrina) or Sept. 23 (for Rita) and December 31, 2005, as a result of hurricane damage. The GO Zone Act also eliminated the earlier provision that restricted this credit to employers of not more than 200 employees.
The tax credit equals 40% of the first $6,000 of wages paid to the employee prior to January 1, 2006.
The credit is a part of the current year business credit under section 38(b) and therefore is subject to the tax liability limitations of section 38(c). New Form 5884A, "Employee Retention Credit," released Jan. 23, 2006, was created especially for this purpose, and Form 3800, "General Business Credit," has been revised to include the deduction.
The work opportunity tax credit is available to employers that hire individuals from certain targeted groups, including felons, low-income workers and others. Under the new law passed after Hurricane Katrina, a new targeted group was created that consists of "Hurricane Katrina employees."
A Hurricane Katrina employee is defined as a person whose principal abode on Aug. 28, 2005, was in the core disaster area and either: (1) was hired between Aug. 28, 2005, and Aug. 27, 2007, for a position located in the core disaster area, or (2) was displaced from their home because of Hurricane Katrina and was hired between Aug. 28, 2005, and Dec. 31, 2005, at a new place of employment located outside the core disaster area.
The credit against the employer's federal income taxes is equal to 40% of the first $6,000 of wages paid to each qualifying employee during their first year of employment who worked more than 400 hours. (For employees who worked equal to or less than 400 hours but more than 120 hours, the credit equals 25% of their first-year qualified wages not in excess of $6,000; no credit is permitted if the employee worked fewer than 120 hours.)
Employers wishing to claim the credit must complete the new version of Form 8850 and follow the instructions for that form.
Along with increased expensing, the GO Zone Act enhances the ability to use the "carryback" of some net operating losses (NOL) incurred between the storms and the end of 2007 to offset company income in prior years. Losses that may qualify include casualty losses resulting from the storms, moving expenses for employees after the storms, temporary housing expenses for employees working in the GO Zone, hurricane-related repair expenses and the depreciation of new property purchased and placed in service in the GO Zone during the tax year in question.
The Act allows the portion of NOL that is qualified GO Zone loss to be carried back five years from the NOL year instead of the usual two years.
Even businesses that entered the GO Zone for the first time between Aug. 27, 2005, and Jan. 1, 2008, have the opportunity to purchase new equipment in the GO Zone and use the applicable depreciation deductions to offset income from prior year operations, whether these operations were in the GO Zone or not.
Again, casinos, liquor stores, golf courses and certain other excluded types of businesses are NOT eligible.
An additional rule permits taxpayers with casualty losses associated with public utility property caused by Hurricane Katrina to elect to either carryback an NOL attributable to certain casualty losses 10 years or treat certain casualty losses as having occurred five years prior to the disaster. For more information on NOLs, see IRS Publication 536 or Publication 542, Corporations.
IRS Code Section 179 allows taxpayers to expense the costs of personal property (both new and used) placed in service during the taxable year for use in a trade or business. The GO Zone Act dramatically relaxes the limitations on this business deduction, both allowing a larger total cost of purchases to qualify and increasing the available deduction. This provision represents an enormous savings opportunity for small businesses that, for example, replaced manufacturing equipment or purchased new construction equipment after the hurricanes. As with the bonus depreciation, casinos, liquor stores, golf courses and certain other excluded types of businesses are NOT eligible. Under the Act, the $108,000 maximum that a taxpayer can deduct under Section 179 is increased to $208,000 for tax year 2006 and $225,000 for tax year 2007. In addition the ceiling on total qualifying property purchases has been raised from $430,000 to $1,030,000.
The expensing deduction can be applied to personal property placed in service in the GO Zone during the taxable year, but not to real property and not to property that was later moved out of the GO Zone. Businesses located in Calcasieu, Cameron, Orleans, St. Bernard, St. Tammany and Washington parishes can also take advantage of this provision for property purchased through the end of 2008.
Most new business equipment can be either depreciated over its class life or expensed immediately under IRS Code Section 179. Under the GO Zone Act, businesses of all sizes affected by Hurricane Katrina can take a special first-year depreciation deduction for qualified property placed in service after Aug. 27, 2005, and used in the conduct of a trade or business within the GO Zone. The special deduction is equal to 50% of the property's depreciable basis. Qualified property includes tangible personal property with a depreciation recovery period of 20 years or less, most computer software, water and utility property, and most commercial and residential real property. Casinos, liquor stores, golf courses and certain other excluded types of businesses are NOT eligible.
The 50% bonus depreciation opportunity can be applied to personal property only if placed in service before the end of 2007; however, it applies to qualified real estate if placed in service through the end of 2008 or 2010, depending on the location of the qualified real estate, meaning substantial tax savings are still available for businesses considering major investments in the GO Zone. In addition, the qualifying placed-in-service date has been extended to Dec. 31, 2010, for real estate located and used in Calcasieu, Cameron, Orleans, St. Bernard, St. Tammany and Washington parishes. Form 4562, "Depreciation and Amortization," has been revised to reflect these changes. Notice 2006-77 provides additional information and clarification on the bonus depreciation; it is available elsewhere on this site.
To aid businesses that suffered significant losses as a direct result of the hurricanes, Congress enacted some extraordinary tax provisions to lessen the financial impact of the costs of cleanup and damaged buildings. These incentives represent a significant cost savings for businesses that lost buildings or conducted cleanup work between the storms and the end of 2007, as well as businesses or investors that purchased damaged property in the GO Zone through the end of 2007.
While the existing tax law required most costs of debris removal to either be treated as ordinary business expenses or capitalized as part of the basis of damaged buildings, the Act allows taxpayers to claim a current deduction for 50% of any qualified GO Zone cleanup costs incurred up to Dec. 31, 2007. This includes costs for the removal of debris or the demolition of damaged structures on business property located in the GO Zone.
Because the Act does not limit this write-off to businesses that existed before the storm, investors who purchased business property in the GO Zone may also be able to use this incentive to their advantage by claiming the 50% deduction on cleanup and demolition costs and then selling the property for a profit.
Businesses in hurricane-affected areas that incurred such costs immediately after the storms but failed to claim this deduction on earlier returns should keep in mind the three-year window on amending returns.
In addition to expensing for ordinary cleanup of storm damage, brownfield expensing is extended and expanded to include brownfield sites in the GO Zone that are contaminated by petroleum products.
Under present law, taxpayers could have elected to deduct or expense certain environmental remediation expenditures that were paid or incurred prior to Jan. 1, 2006 (see Section 198 of the IRS Code), instead of capitalizing these costs. The GO Zone Act extends the Section 198 expensing provision for two years, through Dec. 31, 2007, for qualified contaminated sites located in the GO Zone.
While petroleum products generally were not regarded as hazardous substances for purposes of Section 198, under the GO Zone Act petroleum products are generally treated as hazardous substances for purposes of applying the expense provision within the GO Zone. While this provision is also now expiring, qualifying businesses should keep in mind that it may be applied through amending the 2005 and 2006 returns.
The GO Zone Act includes a substantial incentive for businesses and developers to invest in historic districts and historic buildings. Under existing tax law, a 20% credit is available for rehabilitation expenditures on certified historic structures, which includes buildings listed in the National Register or located in a historic district. A 10% credit is available for rehabilitating structures built before 1936.
Under the Act, the amount of these rehabilitation tax credits is increased from 20% to 26% for historic buildings and from 10% to 13% for pre-1936 buildings. The rehabilitated buildings must be located in the GO Zone, and the expenditures must be made prior to Jan. 1, 2009, to qualify.
Certain requirements must be met to maintain the integrity of the existing historic structure and to depreciate the value of the investment; interested businesses should check with the IRS or a professional tax adviser to ensure that renovation plans meet the criteria.
For further information on how to file for this credit, see Form 3468. Additional time is provided for buildings in the GO Zone to meet certain tests in order to be a qualified rehabilitated building. For the affected areas, see Pub. 4492, "Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma." For details on the relief provided, see items 2 and 3 on page 3 and Notice 2006-38, 2006-16 I.R.B. 777.
For taxpayers who hold less than 500 acres of qualified timber property used in commercial production of timber products, the GO Zone Act doubles the present law expensing limit for reforestation expenditures. These small timber owners are allowed to expense up to $20,000 of such costs incurred through the end of 2007, as opposed to $10,000 under current law.
Reforestation expenditures are the costs of forestation or reforestation activities in connection with planting and seeding, including costs of site preparation, seed, labor, tools and depreciation on equipment used in planting or seeding.
In addition, small timber owners may elect a five-year carryback of net operating losses incurred after August 27, 2005, and before 2007. Under present law, the NOL arising from a "farming loss" can be carried back five years, but "farming losses" do not include losses incurred in the commercial production of timber products. The GO Zone incentive allows certain taxpayers to count losses attributable to qualified timber property as farming losses. Again, the benefit is limited to timber owners with qualified timber property that does not exceed 500 acres at any time during the taxable year.
The GO Zone Act provides an extra allocation of $1 billion from 2005 through 2007 in New Markets Tax Credit authority to investments in Community Development Entities (CDEs) with recovery and redevelopment of the Zone as a significant mission.
The expensing deduction can be applied to personal property placed in service in the GO Zone during the taxable year, but not to real property and not to property that was later moved out of the GO Zone. Businesses located in Calcasieu, Cameron, Orleans, St. Bernard, St. Tammany and Washington parishes can also take advantage of this provision for property purchased through the end of 2008.
Established by Congress in December 2000, the NMTC Program permits individual and corporate taxpayers to receive a credit against federal income taxes for making qualified equity investments in CDEs. Substantially all of the taxpayer's investment must in turn be used by the CDE to make qualified investments in low-income communities.
The credits provide a taxpayer who invests in a qualified CDE a credit against income tax over a seven-year period.
To find out more about New Markets Tax Credits in Louisiana, investors should contact Louisiana Economic Development at (225) 342-0215.
GO Zone provisions make it easier to qualify a project for low-income housing tax credits and increase the financial benefits of building such projects. The GO Zone Act provides for a greater allocation of the tax credits in affected areas and increases the number of persons that can potentially qualify as low-income. By easing the requirements and raising the available tax credit, the Act makes building low-income housing in the GO Zone more attractive to investors and developers.
Under present law, each state is eligible for a low-income housing tax credit allocation equal to $1.90 per state resident. Within the GO Zone, this allocation rises to $18 times the state's population in the GO Zone (based on 2004 Census estimates). Plus, the entire GO Zone is treated as a "high-cost area" for the development of low-income housing, increasing the eligible basis of new buildings or rehabilitation expenditures on an existing building from 100% to 130%. The increased credit would also apply to historic buildings, which are already eligible for the Rehabilitation Credit under current law.
This provision can be applied to property placed in service during 2006, 2007 and 2008.
Under the GO Zone Act, employers and employees were given help with post-Katrina housing costs. For the six-month period following the signing of the Act into law (roughly the first six months of 2006), employers were allowed a 30% tax credit for the cost of housing (up to $600 per month per employee) for housing they provided for employees located in the Katrina GO Zone. In addition, employees may exclude from their income up to $600 per month of such cost for the same time period.
Employers who qualify should use new Form 5884-A, "Hurricane Katrina Employee Retention Credit." The credit is carried to Form 3800, "Business Credits," rev. 1/14/06.
Qualifying businesses that failed to claim this special credit on their 2006 return should keep in mind they have three years from the date the original return was filed to file an amended return claiming the credit.
The GO Zone Act created a new category of tax-exempt private activity bonds referred to as "Gulf Opportunity Zone Bonds." GO Zone Bonds present a unique opportunity for private business owners and corporations to borrow capital at very favorable tax-exempt rates to acquire, construct, reconstruct or renovate non-residential real property, qualified residential rental projects, and public utility property in the GO Zone. Louisiana was allocated nearly $7.9 billion in bonding authority for this purpose.
A wide range of businesses, including public and private corporations, retailers, commercial developers, utilities and hospitals, have the opportunity to build or rebuild using these bonds at borrowing costs that can be as much as 1.5% to 2% below conventional financing options. While the capital still must be raised from private sources, businesses can essentially use the state's tax-exempt borrowing authority to borrow money at a low interest rate. In order to be treated as tax-exempt bonds, 95% or more of the net proceeds must be used for qualified project costs in the GO Zone and the bonds must be issued prior to Jan. 1, 2011.
Eligible projects include office buildings, warehouses, rental housing, manufacturing facilities, shopping centers and many other private sector projects. Qualified project costs include the costs of acquisition, construction, reconstruction and renovation of real property (including buildings and their structural components and fixed improvements associated with such property). Certain types of projects are excluded, including golf courses, racetrack or other gambling facilities, and liquor stores.
Note: New GO Zone property cannot qualify for BOTH tax-exempt bond financing and the special 50% bonus depreciation incentive.
As an alternative to traditional tax-exempt bonds, states and local governments may issue tax-credit bonds for limited purposes. Two types of tax-credit bonds may be issued under present law. "Qualified zone academy bonds" are bonds issued for interest-free financing of renovating, providing equipment, developing course materials, or training teachers for certain public school programs in schools that have at least 35% of students eligible for free or reduced-cost lunch program. QZABs are issued in support of Qualified Zone Academies, schools (or programs within a school) that enter into partnerships with local businesses to enhance local education under a plan approved by the local school system, and then sold to a buyer who is willing to take a tax credit instead of an interest check. "Clean renewable energy bonds" are a special type of tax-credit bond providing electric cooperatives and electric utilities the equivalent of an interest-free loan for financing qualified energy projects. CREBs are largely modeled on the QZAB program. They deliver an incentive comparable to the production tax credit that is available to private renewable energy project developers and investor-owned utilities.
Rather than receiving interest payments, a taxpayer holding a tax-credit bond receives credits that can be claimed against regular income tax and alternative minimum tax liability.
