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2005 HURRICANE RELIEF AND THE INTERNAL REVENUE CODE
Once again practitioners should be reminded that the Internal Revenue Code can "giveth as well as Taketh" as a primary policy instrument of Congress. Yes, "a billion here, a billion there and pretty soon you are talking about some serious money". Tax practitioners should brace for an onslaught of intricate new tax provisions as they enter the "busy season" in the form of the touted $8 Billion "Gulf Opportunities Zone Act of 2005" (H.R. 4440) ("the "Act") which President Bush signed into law on December 21, 2005, just in time for Christmas for the many weary and devastated hurricane victims of the 2005 hurricane season, arguably the most destructive in American history. The Act is a modest federal down payment on what may well be the most expensive disaster mitigation endeavor undertaken in our modern history. Relying on deficit financing, targeted taxpayer relief measures include a wide range of provisions to encourage rebuilding of the areas ravaged by Hurricanes Katrina, Rita and Wilma, coupled with extending the taxpayer relief measures included in KETRA ( for victims of Hurricanes Rita and Wilma).
Tacked on to these measures is a veritable hodgepodge of "technical corrections" to prior tax acts including the Energy Policy Act of 2005, the American Jobs Creation Act of 2004, and the Jobs and Growth Tax Relief Reconciliation Act of 2003. Better get your atlas out as geographically, the Act is targeted to newly-defined zones including the "GO Zone" (or Gulf Opportunity Zone) , the "Rita GO Zone" and the "Wilma GO Zone", further complicating compliance, but purposefully designed by Congress to benefit the true victims of these natural disasters. The Act targets it salve primarily to individuals and businesses, including timber growers and farmers, purposefully excluding as beneficiaries of this targeted relief private or commercial golf courses, country clubs, or any property used directly in connection with gambling or animal racing, purposefully excluding much of the commercial activity in New Orleans and coastal Mississippi.
Highlights of the Act most apt to affect tax practitioners include a capital cost recovery provisions in the form of a bonus 50% first-year depreciation allowance allow allows taxpayers to claim an additional first-year bonus depreciation allowance equal to 50% of the adjusted basis of qualified GO Zone property. The bonus first year depreciation deduction is equal to 50% of the adjusted basis of the qualifying GO Zone property. The Act's provision of a special five-year carryback period (instead of two years) for a "qualified GO Zone loss" will allow businesses impacted or destroyed by these natural disasters to generate some needed liquidity from "the good old days" of the pre-loss era.
Now the big dollars….Louisiana, Mississippi and Alabama are granted the authority to issue a special class of private activity bonds, called GO Zone Bonds, outside of the state volume caps with bond proceeds used to pay for acquisition, construction, and renovation of nonresidential real property, qualified low-income residential rental housing, single-family residential housing, and public utility property located in the Zone. Of particular significance is the creation of a "New Markets Tax Credit" (IRC § 45D) capped at $2 billion for 2005 and $3.5 billion for 2006 and 2007 and other tax exempt bond provisions in the Act would allow Alabama, Louisiana, and Mississippi to issue tax-exempt GO Zone bonds between the date of the section's enactment and January 1, 2011 capped at a maximum per state of $2,500 multiplied by the portion of the state's population in the GO Zone at the time of the disaster together with a federal guarantee of 50% of the outstanding principal of certain bonds issued by Alabama, Louisiana or Mississippi prior to January 1, 2009, with an aggregate ceiling of $3 Billion.
Back to fundamental tax relief to individuals, KETRA provisions are modified by the Act notably including another liquidity maker in the form of certain retirement plan distributions wherein the 10% penalty tax is waived on early withdrawals if made before 2007 with a maximum amount that could be withdrawn without penalty capped at $100,000. Further, funds could be re-contributed to a qualified plan over a three-year period and receive tax-free rollover treatment and with respect to the taxable portion of the distribution, the individual could include one third of such amount in his or her income for three years rather than the entire amount in the year of distribution. The Act also increases the amount that these individuals could borrow from their retirement plans without immediate tax consequences. Finally, the Act in this area allows individuals to re-contribute, without tax consequences, distributions that were made to purchase or construct a principal residence in one of the disaster areas but were not used because of the hurricane.
The Act includes a "Retention Credit" for businesses damaged by a hurricane that continued to pay their employees' wages, regardless of whether the employees performed services and suspends the 50% and 10% limitations for cash contributions made between August 27, 2005, and January 1, 2006. Finally with respect to casualty losses, a taxpayer may only claim a deduction to the extent that the loss exceeds $100 plus the sum of 10% of the taxpayer's adjusted gross income and any taxable gains from property that was involuntarily converted due to the casualty. The Act waives the $100 and 10% floors for casualty losses from Hurricanes Katrina, Rita, and Wilma.
Congress did give considerable and expeditious thought to a wide range of relief measures including individuals, businesses and states. But what is the "catch" to this Congressional focus on hurricane relief? Alas, AMT relief is once again on the "back burner" and must await action most likely in 2006, as Congressional leaders need more time to reconcile the differences between the House and Senate approaches to AMT relief. Stay tuned.
By William P. Elliott, CPA
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