Gulf Opportunity Zone Act of 2005
"GO Zone Act"

On December 21st, President Bush signed the "Gulf Opportunity Zone Act of 2005" into law. The Act carries a wide range of provisions, many of which will benefit us here in South Florida.

Which Areas Receive Aid?

In general, The Act extends many of the benefits of the Katrina Emergency Tax Act ("KETRA") to areas impacted by Hurricanes Rita and Wilma. So here in South Florida, many areas not originally benefiting from KETRA will benefit from the GO Zone Act.

Capital Cost Recovery Provisions

Bonus 50% first-year depreciation allowance. Taxpayers can claim an additional first-year bonus depreciation allowance equal to 50% of the adjusted basis of qualified GO Zone property. The property must meet a number of requirements but in general is tangible personal property acquired and put into use in the GO Zone after August 27, 2005 and before December 31, 2007.

Increased expensing. The Act boosts the Section 179 expensing allowance of $108,000 (in 2006) 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. So for tax years that begin in 2006, if all expensing eligible property placed in service during the year is qualified section 179 Gulf Opportunity Zone property: (1) the maximum expensing allowance is $208,000 ($108,000 regular maximum expensing amount + $100,000); and (2) the investment ceiling limit is $1,030,000 (regular $430,000 phaseout amount +$600,000). The bumped up limits apply only through December 31, 2006. There are limits on who's eligible (massage parlors and package liquor stores need not apply).

Partial expensing for demolition and cleanup costs. 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.

NOL Changes

5-year NOL carryback. The Act provides for a special five-year carryback period in certain specific instances instead of the present two-year carryback period.

Tax Credit Changes

Employee retention credit broadened. KETRA 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 (reference date of Sept. 23, 2005) and Wilma (reference date of Oct. 23, 2005) Zones without regard to the size of the employer.

KETRA Provisions Extended to Victims of Hurricanes Rita and Wilma

As we wrote to your earlier, 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.

Eased casualty loss rules. The 10% of AGI and $100 floors for casualty losses are waived for losses resulting from Hurricanes Katrina (on or after Aug. 25, 2005) Rita (on or after Sept. 23, 2005) or Wilma (on or after Oct. 23, 2005) and incurred in the disaster area, including those claimed on 2004 amended returns

    Qualified plans.
  • The rule exempting up to $100,000 in "qualified Hurricane Katrina distributions" from the Code Sec. 72(t) 10% penalty tax for early withdrawals from qualified plans and IRAs now covers victims of any of the three Hurricanes. The individual must have suffered an economic loss because of a Hurricane and his principal residence must be located in one of the Hurricane disaster areas.
  • Individuals eligible for the premature penalty tax waiver on their Hurricane related distributions 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.
  • Distributions for home purchases which were not finalized because of a Hurricane may be re-contributed to a qualified retirement plan or IRA.
  • The limits on the amount of loans that may be withdrawn from qualified employer plans without paying a current tax are increased for Hurricane 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 (1) on or after Aug. 25, 2005 (Katrina) or on or after the enactment date (Rita or Wilma), and (2) before Jan. 1, 2007, may be deferred, and twelve months may be added to the maximum repayment period of affected loans.
Relief for filing returns and paying taxes until Feb. 28, 2006. IRS, which can provide administrative relief and suspend the performance of required acts (filing tax returns, paying taxes, or filing claims for credits or refunds), must provide that any such relief for taxpayers affected by the Presidentially declared disaster relating to Hurricanes Katrina, Rita, and Wilma be for a period ending not earlier than February 28, 2006. So the 3rd and 4th quarter 2005 estimated tax payments usually due on September 15, 2005 and January 15, 2006 are not due until February 28, 2006.

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