GO Zone Act provisions for hurricane victims.

On Dec. 21, 2005, President Bush signed the Gulf Opportunity Zone Act of 2005 (GO Zone Act), the second of two tax bills that sent relief to Gulf Coast areas affected by Hurricanes Katrina, Rita and Wilma. The bill is based on three special economic zones: the Katrina GO Zone, the Rita GO Zone and the Wilma GO Zone. It provides incentives to businesses and to individuals who live in the zones, and to those who previously did business there. Further, businesses that want to become established in the area are also eligible for tax incentives.

Although many will benefit from the GO Zone Act, some industries are specifically excluded from its provisions (e.g., casinos, liquor stores, golf courses, country clubs, massage parlors, hot tub facilities and race tracks).

Besides the hurricane tax incentives, the GO Zone Act has other provisions that clarify currently enacted tax provisions.

Depredation 

Many GO Zone Act tax incentives resemble those enacted after the September 11 terrorist acts. One such incentive is the 50% bonus first-year depreciation allowance for property placed in service in a GO Zone after Aug. 28, 2005 and before 2008 (2009 for nonresidential real property and residential rental property). Substantially all of the property's use must be for the active conduct of a trade or business in a GO Zone. To qualify, the property must fall into one of six categories: (1) property to which the modified accelerated cost recovery system (MACRS) rules apply and which has a recovery period of less than 20 years, (2) computer software not covered by Sec. 197 to which the MACRS rules apply, (3) water utility property to which the MACRS rules apply, (4) qualified leasehold improvement property to which the MACRS rules apply, (5) nonresidential real property or (6) residential rental property.

The GO Zone Act increases the maximum amount deductible under Sec. 179 by the lesser of $100,000 or the cost of qualified Sec. 179 property acquired by the taxpayer and placed in service during the tax year. This has the effect of increasing the allowable first-year-depreciation Sec. 179 limits from $100,000 to a maximum $200,000 for qualified GO Zone property. While the current law allows indexing for inflation, increased expensing in qualified GO Zone areas is not indexed. Further, the GO Zone Act increases the amount of qualified Sec. 179 GO Zone property placed in service before Dec. 31, 2007, from $400,000 to $1 million. The additional $600,000 in the qualified Sec. 179 GO Zone property limit is not indexed for inflation like the current $400,000 limit.

Deductions

Under the GO Zone Act, taxpayers can elect to treat 50% of any qualified GO Zone clean-up costs (defined as amounts paid or incurred during the period beginning Aug. 28, 2005 and ending Dec. 31,2007) for debris removal caused by demolition of structures situated on real property located in a GO Zone. Property held by taxpayers for trade or business use or the production of income must be Sec. 1221(a)(1) property in the hands of the taxpayer as an expense deductible in the tax year incurred or paid, rather than otherwise capitalized under the Code.

NOLs

The GO Zone Act provides a special five-year carryback for net operating losses (NOLs) to the extent they were generated from GO Zone expenditures. The NOL amount eligible is the sum of the following deductions: (1) certain repair expenses related to Hurricane Katrina, (2) certain moving expenses (principal place of abode was in a GO Zone before Aug. 28, 2005, and the taxpayer was unable to remain in the abode as a result of Hurricane Katrina and is employed in a GO Zone by the taxpayer after the expense is paid or incurred), (3) certain temporary housing expenses, (4) qualified GO Zone casualty losses and (5) depreciation deductions with regard to qualified GO Zone property for the tax year that the property is placed in service.

Credits

As an incentive for students to return to colleges and universities affected by Hurricane Katrina, the GO Zone Act doubles the HOPE and Lifetime Learning credits for students attending an eligible educational institution for tax years beginning in 2005 and 2006. The Hope credit for qualifying students will be $3,000 and the Lifetime Learning credit will increase to a maximum of $4,000. In addition to tuition, certain room and board expenditures will be deductible. Students who attended these educational institutions prior to the damage caused by Hurricane Katrina, as well as those newly enrolled, qualify for the increased thresholds.

Editor:

John L. Miller, CPA 

Faculty Instructor

Metropolitan Community College

Omaha, NE

Mr. Miller is a member of the AICPA Tax Division's IRS Practice & Procedures Committee. Messrs. Keenan and Bloom are members of that Committee. For further information about this column, contact Mr. Miller at [e-mail].

FROM AARON BLOOM, CPA, RIBIS, JONES & MARESCA, P.A., COLUMBIA, MD