News

Dear Client:

On Dec. 21, President Bush signed the Gulf Opportunity Zone (GO Zone) Act of 2005 into law. This much anticipated legislation includes both tax breaks and financial incentives to encourage rebuilding in the areas ravaged by Hurricanes Katrina, Rita and Wilma.

Following is a brief summary of the act’s key provisions. Hannis T. Bourgeois, LLP offers this information to help you understand how the GO Zone Act may affect you or someone you know, and how you might take advantage of it to reduce your tax liability. Do not hesitate to contact us with any questions you may have about this new law or other tax matters.

Gulf Opportunity Zone Defined:

To encourage Gulf Coast recovery, the new law creates a Gulf Opportunity (GO) Zone defined as that portion of the Hurricane Katrina Disaster Area determined by the President to warrant individual or individual and public assistance under the Disaster Relief and Emergency Assistance Act. This encompasses the following 31 Louisiana Parishes: Acadia, Ascension, Assumption, Calcasieu, Cameron, East Baton Rouge, East Feliciana, Iberia, Iberville, Jefferson, Jefferson Davis, Lafourche, Lafayette, Livingston, Orleans, Pointe Coupee, Plaquemines, St. Bernard, St. Charles, St. Helena, St. James, St. John, St. Martin, St. Mary, St. Tammany, Tangipahoa, Terrebonne, Vermillion, Washington, West Baton Rouge, and West Feliciana. The area also includes 47 Mississippi Counties and 10 Alabama Counties.

The act also established Gulf Opportunity Zones for hurricanes Rita and Wilma which are both defined in the same manner. The Hurricane Rita GO Zone includes 21 Louisiana Parishes: Acadia, Allen, Ascension, Beauregard, Calcasieu, Cameron, Evangeline, Iberia, Jefferson, Jefferson Davis, Lafayette, Lafourche, Plaquemines, Sabine, St. Landry, St. Martin, St. Mary, Terrebonne, Vermillion, Vernon, and West Baton Rouge. The area also The act also established Gulf Opportunity Zones for hurricanes Rita and Wilma which are both defined in the same manner. The Hurricane Rita GO Zone includes 21 Louisiana Parishes: Acadia, Allen, Ascension, Beauregard, Calcasieu, Cameron, Evangeline, Iberia, Jefferson, Jefferson Davis, Lafayette, Lafourche, Plaquemines, Sabine, St. Landry, St. Martin, St. Mary, Terrebonne, Vermillion, Vernon, and West Baton Rouge. The area also includes 9 Texas Counties. (Note: Allen, Beauregard, Evangeline, Sabine, St. Landry, and Vernon are the only Louisiana Parishes not already included in the Katrina GO Zone.)

Relief Provisions:

Within the GO Zone, taxpayers will receive targeted relief including: 50% bonus depreciation related to rebuilding, expanded Section 179 expensing for qualified property purchases, five-year net operating loss (NOL) carryback, partial expensing of demolition and clean-up costs, increased low-income housing and rehabilitation credits, expanded employee retention credit (KETRA) to employers of all sizes, increased higher-education credits for students attending college in the GO Zone during 2005 or 2006, increased new markets tax credits for investments in qualified community development entities, and expanded tax-exempt bond limits. The GO Zone provisions as a whole apply only to the specific geographical area devastated by Hurricane Katrina. The provisions have only limited application to those areas affected by Hurricanes Rita or Wilma. Taxpayers outside those boundaries will qualify for relief only if they have investments, or own an interest in property or businesses, within the zone, or invest in the GO Zone within the timeframe targeted for tax relief.

Details on specific provisions:

50% bonus depreciation: The act provides a 50% first-year bonus depreciation allowance to help businesses rebuild in the GO Zone. This write-off applies to the cost of most new property investments made in the zone, including purchased computer software, machinery and equipment, leasehold improvements, and certain commercial and residential rental real estate expenses. For property qualifying for the first-year write-off, all depreciation (including the bonus amount) is exempt from the alternative minimum tax (AMT). The 50% bonus depreciation applies to property acquired by purchase after Aug. 27, 2005, and placed in service before 2008 (before 2009 for real property). This provision applies only to the GO Zone encompassing the Hurricane Katrina disaster area.

Increased Sec. 179 expense: The maximum Sec. 179 expense allowance is increased by $100,000 for qualified GO Zone property placed in service during the tax year. Additionally, the phase-out limitation increases by $600,000. These changes are effective for property placed in service in the zone after Aug. 27, 2005, and before 2008. This provision applies only to the GO Zone encompassing the Hurricane Katrina disaster area.

Expanded NOL carryback: An NOL generated in the GO Zone is eligible for a special five year carryback period, instead of the regular two years. The NOL eligible for the five year carryback is limited to the aggregate amount of: 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 five year carryback applies for losses paid or incurred after Aug. 27, 2005, and before 2008. Taxpayers may make an irrevocable election, for any tax year, to not apply the five year carryback. This provision applies only to the GO Zone encompassing the Hurricane Katrina disaster area.

Increased Education Credits: The GO Zone Act doubles the available education credits under both the Hope Credit and Lifetime Learning credits. The maximum credit under the Hope Credit increases to $3,000 from $1,500. And the Lifetime Learning credit increases to 40% of the first $10,000 spent on post-secondary education (up from 20%). These provisions are applicable only if the tuition is paid to institutions in the Hurricane Katrina Disaster Area, and only for the years 2005 and 2006.

Excluded Businesses: Congress chose to exclude certain businesses from the new law provisions relating to: first year bonus depreciation, increased section 179 expensing, and the 5 year NOL carryback. The following businesses will not benefit: private and commercial golf courses, country clubs, massage parlors, hot tub or suntan facilities, liquor stores and most gambling concerns. Gambling concerns is defined as any property used directly in connection with gambling, animal racing (or the on-site viewing of such racing) and the buildings or portions of buildings dedicated to these activities. For example, the hotel and restaurant portions of gambling businesses may qualify, but the actual gambling areas will not qualify.

Expansion of KETRA: The GO Zone Act extends the following tax relief provisions under KETRA to taxpayers affected by Rita and Wilma. The provision waives penalties for early withdrawals from retirement plans, eases restrictions on qualified plan loan limits and rules, waives the 10% of AGI and $100 floor on casualty losses, and waives the 10% (of taxable income) corporate charitable contribution limit.
Creation of Employee Retention Credit: KETRA created a new tax credit to encourage small employers to keep employees on their payrolls. The credit is 40 percent of the first $6,000 in wages paid to each eligible employee after August 28, 2005, and before January 1, 2006, by employers in the core disaster area, for the period the business is rendered inoperable as a result of damage caused by Hurricane Katrina. The new law expands the employee retention credit in two ways. First, it is no longer limited to small employers (200 employees or less) and does so retroactively. Second, it also applies to employers affected by Hurricanes Rita and Wilma.

Employer Provided Housing: Under the new legislation, employers and employees get help with post-Katrina housing costs. Employees may exclude up to $600 per month for qualified housing expenses provided by their employers. Housing must be located in the Katrina GO Zone. There are also residency requirements. In addition, employers can claim a tax credit of 30% of the excludable amount of housing help provided to employees. This provision only applies for the 6 month period beginning January 1, 2006.
If you have any questions please do not hesitate to call. We would be happy to meet with you at your convenience to discuss the beneficial application of the provisions outlined above.

Sincerely yours,

Hannis T. Bourgeois, LLP