• Gulf Opportunity Zone Act Of 2005
  • January 13, 2006
  • Law Firm: Baker, Donelson, Bearman, Caldwell & Berkowitz, PC - Memphis Office
  • On December 21, 2005, President Bush signed into law the "Gulf Opportunity Zone Act Of 2005" (H.R. 4440). The primary focus of this Act is to provide further tax relief and economic development incentives in the Gulf Opportunity Zone ("GO Zone") impacted by Hurricanes Katrina, Rita and Wilma. The GO Zone includes areas designated by the President to warrant individual and public assistance due to these hurricanes. The following summarizes some of the Act's provisions encouraging growth in the GO Zone.

    Capital Cost Recovery

    The Act provides a 50% bonus first-year depreciation deduction to help eligible businesses rebuild in the GO Zone, much like the allowance enacted after the September 11, 2001 attacks. Businesses will receive the additional deduction for the costs of most new property investments acquired or placed in service after August 27, 2005 and before January 1, 2008.

    The Act increases the maximum expense allowance by the lesser of $100,000 or the cost of ยง179 GO Zone property, with phase-out limits beginning at $600,000.

    The Act also permits deductions for certain demolition and cleanup costs related to property held by the taxpayer in the GO Zone for use in a trade or business. The Act further permits expensing of certain environmental remediation costs paid or incurred after August 27, 2005 and before January 1, 2008, in connection with a qualified contaminated site located in the GO Zone. Finally, the Act increases the amount of reforestation expenses that a taxpayer may deduct, so long as the timber is located in the GO Zone, the taxpayer owns less than 500 acres, and the taxpayer is not a corporation or a REIT. Again, this provision applies to reforestation expenses paid or incurred after August 27, 2005 and before January 1, 2008.

    NOL Provisions

    The Act provides a special five-year carry-back period for a specified amount of net operating losses ("NOLs") related to the GO Zone. The amount of eligible NOLs is limited to the total of the following: (1) qualified GO Zone casualty losses; (2) certain moving expenses; (3) certain temporary housing expenses; (4) depreciation deductions for qualified GO Zone property; and (5) deductions for certain repair expenses related to Hurricane Katrina. This provision applies to NOLs arising in taxable years ending on or after August 28, 2005.

    The Act also provides for a five-year carry-back for non-corporate taxpayers and non-REIT taxpayers which are timber producers on less that 500 acres of land and also provides for a ten-year carry-back for losses associated with public utility property caused by Hurricane Katrina.

    Tax Credits

    The Act: (1) increases the rehabilitation tax credit (from 20% to 26%) for certain buildings located in the GO Zone applicable to qualified expenditures paid or incurred after August 27, 2005 and before January 1, 2009; (2) modifies the employee retention credit provided under the Katrina Emergency Tax Relief Act Of 2005 ("KETRA") -- see our Tax Alert of September 26, 2005 -- to permit its application to employers with more than 200 employees; (3) provides an income exclusion for employees and a thirty percent (30%) credit to employees for eligible employer-provided housing in the GO Zone; (4) doubles the Hope Scholarship Credit and the Lifetime Learning Credit for the 2005 and 2006 tax years for students attending qualifying institutions in the GO Zone; and (5) increases the funding for the New Markets Tax Credit for qualified community development entities operating in the GO Zone.

    Tax Exempt Bonds

    The Act authorizes the issuance of qualified private activity bonds to finance the construction and rehabilitation of residential and nonresidential property located in the GO Zone. These bond provisions contain numerous technical requirements and limitations, and they are effective for bonds issued by the States of Alabama, Louisiana and Mississippi (or any political subdivision thereof) after December 21, 2005 and before January 1, 2011.

    The Act also creates a new category of tax-credit bonds, referred to as Gulf Tax Credit Bonds, which will entitle the holder to a tax credit on the allowance date. The amount of the tax credit will be determined by multiplying the bond's credit rate by the face amount of the holder's bond, and this tax credit can be claimed against either a taxpayer's regular income tax liability or alternative minimum tax liability. These provisions will be effective for Gulf Tax Credit Bonds issued after December 31, 2005 and before January 1, 2007.

    Extension of KETRA Provisions

    The Act also extends and modifies certain provisions of KETRA relating to tax favored withdrawals from retirement plans, loans from qualified plans, temporary suspension of limitations on charitable contributions, suspension of certain limitations on personal casualty losses and previously extended tax filing deadlines.