After Hurricane Katrina hit the Gulf Coast, Congress quickly passed a number of bills to promote recovery in the affected area, including the Gulf Opportunity Zone Act of 2005 (the "Act"). The Act offers significant tax benefits in the area designated as the Gulf Opportunity Zone (or GO Zone), which consists of the areas hardest hit by the hurricane. These federal tax benefits can provide huge incentives to developers of many different types of projects within the GO Zone, which includes the 31 southern most parishes in Louisiana, 49 counties in Mississippi counties, and 11 counties in Alabama. The tax benefits available to businesses include 50% bonus first-year depreciation, partial expensing of demolition and cleanup costs, a 5-year-NOL carryback and additional new market tax credits.
Bonus 50% first-year depreciation allowance. The Act provides a 50% bonus first-year depreciation allowance to help businesses rebuild in the GO Zone. Businesses get the bonus write-off for the cost of most new property investments made in the GO Zone, including commercial and residential real estate, machinery, and equipment. Further, all depreciation deductions (including bonus depreciation) for property qualifying for the bonus first-year writeoff are exempt from alternative minimum tax calculations. The 50% bonus depreciation allowance generally applies to depreciable property used in an active trade or business that is placed in service before Jan. 1, 2008 (before Jan. 1, 2009 for real property).
Technical requirements of the bonus depreciation provisions require careful planning. For example, the IRS has stated that property leased on a triple net basis does not qualify for bonus depreciation, and therefore front-end planning must occur to work within those confines. Also, where a development or project is owned in a pass-through entity such as an LLC, the entity owners must consider the application of the passive loss rules if they intend to use any tax losses to offset income from other sources.
Partial expensing for demolition and cleanup costs. Normally, no deduction is allowed to the owner or lessee of a building for any loss on demolition of the building, or for any of the demolition expenses. The loss or expenses must be capitalized and added to the basis of the land. However, under the Act, 50% of otherwise capitalized costs of demolition and site cleanup are immediately deductible by businesses in the GO Zone, effective for amounts paid or incurred after Aug. 27, 2005 through 2007.
Net operating loss carryback for qualified GO Zone loss. The Act extends the net operating loss carryback period from 2 to 5 years for certain net operating losses attributable to business activity in the GO Zone, including losses generated by bonus depreciation deductions. This often allows a taxpayer to receive a refund for prior taxes paid once a project is put in service.
New markets tax credit. The new markets tax credit (NMTC) program promotes investment in low-income communities lacking access to capital. Investments are made by qualified community development entities (CDEs) through debt or equity offered to businesses developing projects in certain qualifying census tracts. The Act allows an additional $300 million in 2005 and 2006 and an additional $400 million in 2007 for NMTC authority for CDEs operating in the GO Zone. This program can provide an alternative financing source with a below market interest rate, and currently several CDEs are trying to locate projects in the GO Zone in which to invest.
This new legislation is designed to assist in rebuilding the areas affected by last year's storms and offers tremendous potential benefits to developers and anyone interested in building or redeveloping a retail, industrial, or multi-family residential project within this area. With careful planning, GO Zone benefits can greatly improve the profitability of a wide variety of projects and provide substantial benefits to developers, lenders and residents of the area affected by these storms. Baker, Donelson's attorneys assisted in the drafting of this legislation and are familiar with all aspects of the Act.