Gulf Opportunity Zone Act of 2005: tax breaks for victims of hurricanes Katrina, Rita and Wilma.EXECUTIVE SUMMARY * The Gulf Opportunity Zone Act of 2005 provides significant tax relief to those who were affected by hurricanes Katrina, Rita and Wilma. * Central to the legislation is the establishment of the Gulf Opportunity (GO) Zones, the areas hit hardest by the hurricanes for which there are tax incentives for individuals and businesses to revitalize and rebuild in these areas. * The act extends many of the provisions contained in the Katrina Emergency Tax Relief Act of 2005 to cover individuals and businesses affected by hurricanes Rita and Wilma. These provisions apply to qualified Hurricane Rita Hurricane Rita was the fourth-most intense Atlantic hurricane ever recorded and the most intense tropical cyclone ever observed in the Gulf of Mexico. Rita caused $11.3 billion in damage on the U.S. Gulf Coast in September 2005. individuals and qualified Hurricane Wilma Hurricane Wilma was the most intense hurricane ever recorded in the Atlantic basin. Exceeding the 21 storms of the 1933 season, Wilma was the twenty-second storm (including the subtropical storm discovered in reanalysis), thirteenth hurricane, sixth major hurricane, and fourth individuals-people whose principal residence on September 23, 2005, was located in a disaster area and who sustained economic loss due to the hurricanes. * The act amends the Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. with respect to hurricane-related tax relief. ********** After Hurricane Katrina  Editing of this page by unregistered or newly registered users is currently disabled due to vandalism. became the costliest catastrophe in American history, hurricanes Rita and Wilma caused even more damage. In response President Bush signed into law the Gulf Opportunity Zone Act of 2005. The act contains both hurricane- and non-hurricane-related provisions. This article examines only the tax relief provided to those locations. The first step in understanding the tax benefits for which taxpayers may be eligible is to understand the locations to which the legislation applies. Section 101 of the act adds IRC (Internet Relay Chat) Computer conferencing on the Internet. There are hundreds of IRC channels on numerous subjects that are hosted on IRC servers around the world. After joining a channel, your messages are broadcast to everyone listening to that channel. section 1400M, which defines three areas and three zones. THE GO ZONE The heart of the Gulf Opportunity Zone Act is the establishment of the GO Zones (see maps) and the tax incentives to help individuals and businesses revitalize and rebuild in those areas. Here is a review of the significant provisions. Bonus 50% depreciation. The act establishes a bonus 50% first-year depreciation allowance under IRC section 167(a) for qualified Gulf Opportunity Zone property, which includes property described in IRC section 168(k)(2)(A)(i), nonresidential real property and residential rental property located in the zone that the taxpayer acquired and substantially used in the trade or business on or after August 28, 2005. Nonresidential real property and residential rental property must be placed in service by December 31, 2008. All other property must be placed in service by December 31, 2007. Increase in expensing under IRC section 179. Under general tax law, a business may elect to expense up to $100,000 (adjusted to $108,000 for 2006) for the cost of machinery and equipment bought for the business's use. The act increases this amount to $200,000 (adjusted to $208,000 for 2006). It also increases the level of investment at which the phaseout phase·out n. A gradual discontinuation. applies from $400,000 (adjusted to $430,000 in 2006) to $1 million (adjusted to $1.03 million for 2006). To qualify the property, must be placed in service in the GO Zone between August 28, 2005, and December 31, 2007. Expensing for certain demolition and cleanup costs. Generally there is no allowed deduction for the owner or lessee of a building for loss on demolition or demolition-related expenses, but the act allows taxpayers to expense 50% of qualified GO Zone cleanup costs. A qualified Gulf Opportunity Zone cleanup cost is defined as a cost paid or incurred between August 28, 2005, and December 31, 2007, for the removal of debris from, or the demolition of structures on, real property located in the GO Zone that is (1) held by a taxpayer for use in a trade or business or for the production of income or (2) is IRC section 1221(a)(1) property in the taxpayer's hands. Extension of expensing for environmental remediation Generally, remediation means providing a remedy, so environmental remediation deals with the removal of pollution or contaminants from environmental media such as soil, groundwater, sediment, or surface water for the general protection of human health and the environment or from a costs. The act extends IRC section 198 expensing for environmental remediation expenditures through December 31, 2007. (This provision was set to expire for expenditures paid or incurred on or before December 31, 2005.) To qualify the expenditures must be made in connection with a qualified containment site located in the GO Zone and be paid or incurred between August 28, 2005, and January 1, 2008. Note that the act adds petroleum products as a hazardous substance. Special rules for small timber products. Taxpayers with less than 500 acres of qualified timber property are eligible for an increased expensing limit for this property and a five-year (instead of two-year) net operating loss operating loss The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit. Compare operating income. (NOD carryback. These special rules for timber products apply to qualified timber property located in the GO Zones. Treatment of NOL NOL - Never Offline losses attributable to GO Zone losses. The act extends the NOL carryback period from two to five years if a portion of any NOL for any taxable year Taxable year The 12-month period an individual uses to report income for income tax purposes. For most individuals, their tax year is the calendar year. is a qualified GO Zone loss. A qualified Gulf Opportunity Zone loss includes depreciation deductions for GO Zone property and deductions for certain repair expenses that resulted from Hurricane Katrina, business casualty losses caused by Hurricane Katrina in the GO Zone and moving expenses and temporary housing expenses for employees working in the GO Zone. Education tax benefits. Generally taxpayers may claim a Hope Credit of $1,500 (adjusted to $1,650 in 2006) and a Lifetime Learning Credit Lifetime Learning Credit A federal initiative whereby a person is eligible for a non-refundable credit for a specific amount spent on higher education tuition and fees during the year. Notes: These fees can be for the person, his or her spouse, or his or her dependents. of $2,000. The act doubles these amounts to $3,000 (adjusted to $3,300 in 2006) and $4,000, respectively, for individuals who attend an eligible educational institution in the GO Zone. Housing tax benefits. The act provides tax benefits to both employers and employees with respect to employer-provided housing for individuals affected by Hurricane Katrina. A qualified employee is one whose principal residence was in the GO Zone on August 28, 2005, and who worked in the GO Zone for a qualified employer that furnished lodging. A qualified employer is any employer with a trade or business within the GO Zone. Qualified employees may exclude up to $600 per month for housing provided by an employer located in the GO Zone. Qualified employers are entitled to a 30% tax credit (maximum $180) for each employee to whom they provide such lodging. KATRINA PROVISIONS EXTENDED FOR HURRICANES RITA AND WILMA While the Katrina Emergency Tax Relief Act (KETRA KETRA Katrina Emergency Tax Relief Act of 2005 (US) ) of 2005 provided significant tax relief to those affected by Katrina, the majority of these measures did not amend the Internal Revenue Code. But the Gulf Opportunity Zone Act effectively repealed the relevant KETRA provisions and incorporated them into the GO Zone Act and amended the Internal Revenue Code. Here are the most prominent KETRA provisions that have been extended to victims of hurricanes Rita and Wilma. Use of retirement funds. KETRA had established special rules regarding the retirement funds of individuals who lived in the Hurricane Katrina Disaster Area (see map 1) and sustained economic losses due to the storm. Such individuals can take "qualified Hurricane Katrina distributions" from retirement plans of up to $100,000 without penalty and without the 10% early distribution penalty or 20% mandatory withholding tax The amount legally deducted from an employee's wages or salary by the employer, who uses it to prepay the charges imposed by the government on the employee's yearly earnings. ; the roll-over period to repay distributions is extended to three years and the income tax is spread evenly over three years for the penalty-free withdrawals. Taxpayers who withdrew savings from certain retirement plans to purchase or construct a home but did not do so due to Hurricane Katrina, can recontribute the funds. Katrina survivors also can borrow up to $100,000 from a pension plan and delay repayment for one year for outstanding loans from qualified plans. MAP 1 The Katrina GO Zone covers Louisiana Mississippi and Alabama Louisiana: The parishes of Acadia, Ascension, Assumption, Calcasieu, Cameron, East Baton Rouge Baton Rouge (băt`ən r  zh) [Fr.,=red stick], city (1990 pop. 219,531), state capital and seat of East Baton Rouge parish, SE La. , East Feliciana, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Orleans, Plaquemines, Pointe Coupee, St. Bernard St. Bernarda very large (110-200 lb) dog with massive, broad head, medium-sized ears lying close to the head, and a long tail. There are two varieties, the most familiar (rough) has a long, thick coat, while the smooth variety has a shorter coat, lying close to the body. , St. Charles, St. Helena, St. James, St. John the Baptist John the Baptist prophet who baptized crowds and preached Christ’s coming. [N.T.: Matthew 3:1–13] See : Baptism John the Baptist head presented as gift to Salome. [N.T.: Mark 6:25–28] See : Decapitation , St. Martin St. Martin in midwinter, gave his cloak to a freezing beggar. [Christian Hagiog.: Brewer Dictionary] See : Kindness , St. Mary, St. Tammany, Tangipahoa, Terrebonne, Vermilion vermilion, vivid red pigment of durable quality. It is a chemical compound of mercury and sulfur and is known as red sulfide of mercury; it was formerly obtained by grinding pure cinnabar but is now commonly prepared synthetically. , Washington, West Baton Rouge and West Feliciana. Mississippi: The counties of Adams, Amite, Attala, Choctaw, Claiborne, Clarke, Copiah, Covington, Forrest, Franklin, George, Greene, Hancock, Harrison, Hinds, Holmes, Humphreys, Jackson, Jasper, Jefferson, Jefferson Davis, Jones, Kemper, Lamar, Lauderdale, Lawrence, Leake, Lincoln, Lowndes, Madison, Marion, Neshoba, Newton, Noxubee, Oktibbeha, Pearl River Pearl River, uninc. village (1990 pop. 15,314), Rockland co., SE N.Y., near the N.J. line. It is a residential suburb of New York City, and a computer and telecommunications research and development center. Pearl River River, central Mississippi, U. , Perry, Pike, Rankin, Scott, Simpson, Smith, Stone, Walthall, Warren, Wayne, Wilkinson, Winston and Yazoo. Alabama: The counties of Baldwin, Choctaw, Clarke, Greene, Hale, Marengo, Mobile, Pickens, Sumter, Tuscaloosa and Washington. Florida: No counties eligible. The Hurricane Katrina Disaster Area includes all of Louisiana CODE, OF LOUISIANA. In 1822, Peter Derbigny, Edward Livingston, and Moreau Lislet, were selected by the legislature to revise and amend the civil code, and to add to it such laws still in force as were not included therein. Mississippi, Alabama and Florida Source: IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. , www.irs.gov. [ILLUSTRATION OMITTED] The Gulf Opportunity Zone Act extends these special rules to qualified Hurricane Rita individuals and qualified Hurricane Wilma individuals. A qualified Hurricane Rita individual is one whose principal residence on September 23, 2005, was located in the Hurricane Rita Disaster Area (see map 2) and who sustained economic loss due to the storm. Similarly, a qualified Hurricane Wilma individual is one whose principal residence on October 23, 2005, was located in the Hurricane Wilma Disaster Area (see map 3) and who sustained economic loss due to Hurricane Wilma. MAP 2 The Rita GO Zone includes southern Louisiana and southeastern Texas. Louisiana: The parishes of Acadia, Allen, Ascension, Beauregard, Calcasieu, Cameron, Evangeline, Iberia, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Plaquemines, Sabine, St. Landry, St. Martin, St. Mary, St. Tammany, Terrebonne, Vermilion, Vernon and West Baton Rouge. Texas: The counties of Angelina, Brazoria, Chambers, Fort Bend Fort Bend was a blockhouse built in a large bend of the Brazos River in what is now Fort Bend County, Texas to provide protection against Indian raids. It was erected in November 1822 by several members of Stephen F. Austin's Old Three Hundred, including William W. , Galveston, Hardin, Harris, Jasper, Jefferson, Liberty, Montgomery, Nacogdoches, Newton, Orange, Polk, Sabine, San Augustine, San Jacinto San Jacinto, river, c.130 mi (210 km) long, rising in SE Texas as the West Fork and flowing S to Galveston Bay. Its chief tributary is Buffalo Bayou, and both the bayou and the lower river are used for the Houston ship channel. , Shelby, Trinity, Tyler and Walker. The Hurricane Rita Disaster Area includes all of Louisiana and Texas Source: IRS, www.irs.gov. [ILLUSTRATION OMITTED] MAP 3 The Wilma GO Zone covers southern Florida. Florida: The counties of Brevard, Broward, Collier, Glades Glades may refer to:
The Hurricane Wilma Disaster Area covers all of Florida. Source: IRS, www.irs.gov. [ILLUSTRATION OMITTED] Corporate charitable contributions. KETRA removed the 10% charitable contribution deduction charitable contribution deduction An itemized income-tax deduction for donations of assets to Internal Revenue Service-designated organizations. Certain qualifications on this deduction apply, such as a contribution limit of 50% of a taxpayer's adjusted limitation for Hurricane Katrina cash donations made by C corporations during the period beginning August 28, 2005, through December 31, 2005. The Gulf Opportunity Zone Act expands this provision to include cash contributions that are related to hurricanes Rita and Wilma. Casualty losses. KETRA provided that casualty losses attributable to Hurricane Katrina that occurred in the Hurricane Katrina Disaster Area on or after August 25, 2005, are fully deductible. The GO Zone Act extended this provision to casualty losses that occurred in the Hurricane Rita Disaster Area on or after September 23, 2005, and in the Hurricane Wilma Disaster Area on or after October 23, 2005, that were attributable to these horrendous storms. Earned Income Tax Credit The United States federal Earned Income Tax Credit (EITC) is a refundable tax credit that reduces or eliminates the taxes that low-income married working people pay (such as payroll taxes) and also frequently operates as a wage subsidy for low-income workers. (EITC EITC Earned Income Tax Credit EITC Eastern Idaho Technical College EITC Emirates Integrated Telecommunication Company (UAE) EITC Education and Information Transfer Core EITC Electro/Information Technology Conference ) and Child Credit. Under KETRA individuals affected by Hurricane Katrina could use their 2004 earned income Sources of money derived from the labor, professional service, or entrepreneurship of an individual taxpayer as opposed to funds generated by investments, dividends, and interest. amount to calculate the earned income tax credit and refundable child credit on their 2005 tax returns if their earned income in 2005 was less than it was in 2004. The GO Zone Act allows those affected by hurricanes Rita and Wilma to do the same. Employee-retention credit. KETRA created an employee-retention tax credit equal to 40% of the first $6,000 in wages paid to eligible employees by employers of 200 employees or less located in the Katrina Core Disaster Area (see map 1) for the period the business is rendered inoperable inoperable /in·op·er·a·ble/ (in-op´er-ah-b'l) not susceptible to treatment by surgery. in·op·er·a·ble adj. Unsuitable for a surgical procedure. by hurricane damage. The GO Zone Act makes this credit retroactive and also includes larger employers and employers that were affected by hurricanes Rita (see map 2) and Wilma (see map 3). Mortgage revenue bonds. KETRA waived the first-time home buyer requirement for eligibility for low-interest-rate mortgages and allowed up to $150,000 of loan proceeds to be used to repair Hurricane Katrina-damaged homes. The GO Zone Act extends these provisions to individuals affected by Rita and Wilma. PLANNING OPPORTUNITIES The act provides many planning opportunities for CPAs in advising their clients. The following are just a few examples. Retirement plans. There are many planning opportunities with respect to retirement plan funds. Before looking at distributions, CPAs must advise clients about the negatives of taking money out of a retirement plan (that is, less money for retirement). Taking a personal loan may be a better option. It is important to note that all CPAs nationwide must understand these rules since many people affected by the hurricanes are relocating to areas that were not hit by the hurricanes, but nonetheless they have legitimate losses. Investment incentives. The act provides investment incentives through bonus depreciation and increased expensing. CPAs should advise their clients who are interested in investing in the GO Zone of these incentives. Federal tax returns. CPAs may want to review 2005 federal tax returns for certain clients to determine whether filing amended returns would result in better tax results. LOOKING AHEAD The extensive legislation and guidance that were issued in the wake of the three hurricanes offer CPAs many tax-planning opportunities for clients affected by the storms. While this legislation targeted specific areas in the southern United States The Southern United States—commonly referred to as the American South, Dixie, or simply the South—constitutes a large distinctive region in the southeastern and south-central United States. , persons affected by the storm who may be entitled to some form of tax relief are moving to other areas of the country. Therefore, all CPAs must understand the tax relief offered under the act. Keep an eye out for additional guidance, which is likely to come. Practical Tips * All CPAs nationwide must understand these rules since many people affected by the hurricanes are relocating to areas that were not hit by the hurricanes, but nonetheless they have legitimate losses, * Alert taxpayers that properties must be placed in service by certain deadlines, which vary; to claim tax relief. * Inform taxpayers that a qualified cleanup cost is defined as a cost paid or incurred between August 28, 2005, and December 31, 2007. * Note that special rules for timber products apply to qualified timber property located in the GO Zone, that education tax benefits are doubled and that housing benefits apply both to employers and employees. Disaster Times Three Hurricanes Katrina, Rita and Wilma are three of the costliest hurricanes in U.S. history, with Katrina being the costliest ($38.1 billion estimated insured loss), Wilma the third costliest ($8.4 billion) and Rita the seventh costliest ($5 billion). Source: http://katrinainformation.org/disaster2/facts/most_costly. AICPA AICPA See American Institute of Certified Public Accountants (AICPA). RESOURCES Conference AICPA National Conference on Federal Taxes November 6-7, 2006 Washington, D.C. JW Marriott Hotel CPE (Customer Premises Equipment) Communications equipment that resides on the customer's premises. CPE - Customer Premises Equipment 2005 Tax Acts: Four Acts in One (# 733051JA). To register or to order go to www.cpa2biz.com or call the Institute at 888-777-7077. JofA article "Surviving Katrina," JofA, Feb.06, page 58, www.aicpa.org/pubs/jofa/feb2006/altieri.htm. OTHER RESOURCES * IRS Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, www.irs.gov/pub/irspdf/p4492.pdf. * Technical Explanation of the Revenue Provisions of the Gulf Opportunity Zone Act of 2005, www.house.gov/jct/x-8805.pdf. Jason A. Rothman, JD, is an associate at Wickens, Herzer, Panza, Cook and Batista, Avon, Ohio. His e-mail address is jrothman@ wickenslaw.com. Mark P. Altieri, CPA/PFS, JD, LLM LLM abbr. Latin Legum Magister (Master of Laws) LLM Master of Laws [Latin Legum Magister] Noun 1. , is an associate professor of accounting at Kent State University, Kent, Ohio, and special tax counsel to Wickens, Herzer, Panza, Cook and Batista in Avon. His e-mail address is maltieri@wickenslaw.com. |
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