Gulf Opportunity Zone Act of 2005: Tax Breaks for Victims of Hurricanes Katrina, Rita and Wilma

By Rothman, Jason A.; Altieri, Mark P. | Journal of Accountancy, August 2006 | Go to article overview

Gulf Opportunity Zone Act of 2005: Tax Breaks for Victims of Hurricanes Katrina, Rita and Wilma


Rothman, Jason A., Altieri, Mark P., Journal of Accountancy


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 individuals and qualified Hurricane Wilma 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 with respect to hurricane-related tax relief.

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After Hurricane Katrina 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 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 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 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. …

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