President Signs Legislation Expanding 2005 Hurricane Relief
Four months after Hurricane Katrina devastated New Orleans and the Gulf Coast, Congress has approved a second
massive tax relief bill to help individuals and businesses recover. On December 16, 2005, the Senate and the House passed, by unanimous consent, the Gulf Opportunity Zone Act of 2005 (P.L. 109-135). President Bush
promptly signed the bill into law on December 21, 2005.
The new law also extends some tax incentives in the Katrina Emergency Tax Relief Act of 2005 (KETRA) (P.L.
109-73) of September to victims of hurricanes Rita and Wilma.
Gulf Coast tax relief. The new law creates new tax incentives that will accelerate recovery with the following provisions:
Bonus depreciation
Bonus first-year depreciation, part of the 9-11 tax relief package, makes a re-appearance in the Gulf Opportunity
Zone Act. The depreciation deduction under Code Sec. 167 is increased by 50 percent for one year for qualified GO Zone property.
Qualified Katrina GO Zone property means:
Property described in Code Sec. 168(k)(2)(A)(i) (purchased software, leasehold improvements,
covered property with a recovery period of 20 years or less, and certain equipment); or Certain nonresidential real property or residential rental property, substantially all of which is used in the Katrina GO
Zone and is in the active conduct of a trade or business by a taxpayer in the Katrina GO Zone. Original use of property in the GO Zone must start with the taxpayer on or after August 28, 2005. As long as that
requirement is met, the property can be used or new. The property must be acquired by the taxpayer by purchase on or after
August 28, 2005, but only if no written binding contract for the acquisition was in effect before August 28,
2005. Residential rental property and nonresidential real property must be placed in service on or before December 31, 2008. All other property must be placed in service on or before December 31, 2007.
Double limit on business expensing
The regular Code Sec. 179 expensing deduction is $100,000 beginning in 2003 through 2007. The new law increases
the expensing limitation by the lesser of $100,000, or the cost of qualified Code Sec. 179 Katrina Go Zone property. It also increases the $400,000 investment limitation by the lesser of $600,000, or the cost of
qualified Code Sec. 179 Katrina GO Zone property placed in service during the tax year.
Additional clean up/demolitionexpensing
The new law encourages clean up and demolition by allowing taxpayers to expense 50 percent of clean-up costs that
otherwise would be required to be capitalized.
Environmental remediation expensing
Taxpayers may expense some environmental remediation costs incurred in connection with qualified contaminated
sites located in the Katrina GO Zone through December 31, 2007.
Timber expensing/carryback
Small timber producers owning fewer than 500 acres in the Katrina, Rita and Wilma GO Zones will be able to take
advantage of a doubling of expensing for qualified timber property and a fi ve-year "farming" carryback of specified timber net operating losses (NOLs).
Enhanced Net Operating Loss (NOL) carryback
The new law also enhances the carryback of some NOLs, which goes hand-in-hand with increased expensing. The new
law allows taxpayers to carry back qualified NOLs fi ve years instead of two.
Public utility casualty losses
Public utilities in the Katrina GO Zone are eligible for a 10-year carry back on casualty losses.
Employee retention credit
The credit is 40 percent of the fi rst $6,000 in wages paid to each eligible employee after August 28, 2005,
and before January 1, 2006, by employers in the core disaster area, for the period the business is rendered
inoperable as a result of damage caused by Hurricanes Katrina, Rita & Wilma.
WHO GETS WHAT TAX RELIEF?
Hurricane tax relief under the new law is distributed based on residency and activity in the following
designated areas:
Gulf Opportunity (GO) Zone- That portion of the Hurricane Katrina disaster area determined by the President to warrant individual or individual and public assistance from the Federal Government under the Robert T. Stafford
Disaster Relief and Emergency Assistance Act by reason of Hurricane Katrina.
Hurricane Katrina Disaster Area- An area with respect to which a major disaster has been declared by the President before September 14, 2005 under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason
of Hurricane Katrina.
Rita GO Zone- Same criteria as GO Zone, but with Hurricane Rita rather than Hurricane Katrina the cause.
Hurricane Rita Disaster Area- Area declared by the President as a major disaster before October 6, 2005 under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason by reason of Hurricane Rita.
Wilma GO Zone- Same criteria as GO Zone, but with Hurricane Wilma rather than Katrina the cause.
Hurricane Wilma Disaster Area- Area declared by the President as a major disaster before November 14, 2005 Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason by reason of Hurricane Wilma not extend this
special treatment to businesses affected by Hurricanes Rita or Wilma.
Employer-provided housing
Under the new legislation, employers and employees get help with post-Katrina housing costs
INVESTMENT INCENTIVES
New markets tax credit
The new law expands the new markets tax credit for the Katrina GO Zone. Community development entities (CDEs) are
allowed an additional $300 million in 2005 and 2006 and $400 million in 2007.
Tax-exempt bonds
The new law authorizes the issuance of special tax-exempt and mortgage bonds to help finance recovery.
Tax-credit bonds
The new law also gives states a limited ability to pay out federal tax credits instead of interest to investors
in "Gulf Tax Credit Bonds."
Helping homeowners rebuild
The new law expands the pool of individuals who qualify for help through state-issued tax-exempt mortgage revenue
bonds.
Low-income housing credit
The new law increases the state low income housing credit ceiling. It also relaxes area gross median income
determinations.
EDUCATION CREDIT ENHANCEMENTS
The new law doubles the HOPE credit and the Lifetime Learning credit for individuals who attend an eligible
educational institution in the Katrina GO Zone for any tax year beginning in 2005 or 2006. The HOPE credit for qualifying students will be $3,000 and the Lifetime Learning credit increases to a $4,000 maximum. In
addition, certain room and board expenses qualify.
EXTENDING KATRINA RELIEF TO RITA AND WILMA VICTIMS
After Hurricane Katrina, Congress passed the Katrina Emergency Tax Relief Act of 2005 (KETRA). KETRA targeted tax relief primarily to individuals. The new
law extends some of the provisions in KETRA to victims of Hurricanes Rita and Wilma to help them recover. 5
Casualty losses
The new law lifts the usual casualty loss restrictions (10 percent of AGI and a $100 floor) for victims of
Hurricanes Rita and Wilma. Losses from Hurricanes Rita and Wilma are effectively treated as a separate deduction from all other
casualty losses. Elimination of limitations also will likely mean larger refunds for Rita and Wilma victims who amend their 2004 returns.
Reminder. Taxpayers
in presidentially- declared disaster areas have the option of deducting their casualty loss on the return for the year in which the loss occurred of the previous year's return.
Charitable giving
KETRA waived the 10-percent-of-taxable- income limitation on corporate donations for cash contributions made for
Hurricane Katrina relief. The new law extends this treatment to corporate donations of cash made for Hurricane Rita and Hurricane Wilma relief, effective for contributions made before January 1, 2006. For
individuals, KETRA lifted the 50-percent AGI annual limit on charitable contributions made between September 1, 2005, and December 31, 2005. This special provision applied whether contributions by an individual were
made to a hurricane-related charity or to any charitable organization or institution nationwide. The new law makes no further changes to this tax break.
Retirement plan distributions
KETRA relaxed the strict rules governing early distributions from retirement plans and IRAs. KETRA also
made it easier for victims of Hurricane Katrina to borrow from their pension plans. Now, victims of Hurricanes
Rita and Wilma are also eligible for this special treatment, up to a total of $100,000 in distributions.
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