The GO Zone: Federal Tax Redevelopment/Development Incentives

In the Aftermath of Hurricane Katrina

 

In the worst natural disaster of recent history, parts of Louisiana, Mississippi and Alabama were ravaged by Hurricane Katrina.  In December 2005 tax legislation was enacted to provide incentives for the redevelopment/development of the Katrina disaster area portions of Alabama, Louisiana and Mississippi – the Gulf Opportunity Zone or “GO Zone.”  The GO Zone geographic area, as shown on the attached maps, is much broader than generally thought.  In addition to the devastated coastal areas, the GO Zone includes larger portions of the affected states which saw comparatively little hurricane damage or disruption to local economies  or infrastructure.  For example, the GO Zone extends north of Jackson, Miss. and as far as Columbus, Miss. and Tuscaloosa, Ala.  In Louisiana, the GO Zone includes not only New Orleans, but also Baton Rouge.

 

This legislation provides unique federal “economic development” incentives for business to rebuild in or expand within the GO Zone.  Particularly if combined with state incentives, the opportunities for companies to develop facilities in the GO Zone are very attractive.

 

The federal tax legislation is designed to reduce the cost of capital through significant tax incentives for the development of buildings (non-residential and residential) and the location of equipment to engage in business in the GO Zone.  The federal incentives include:

 

1.   Exempt Bonds.  The availability of almost $15 billion of tax exempt bond capacity as allocated by the affected states to creditworthy businesses for residential and non-residential buildings.  The interest on these bonds is exempt from both income tax and alternative minimum tax (AMT).  Unlike the normal private activity bonds, there is no $10 million per project limitation nor must the facilities be industrial or wharves.  These bonds can be used for hotels, office buildings, retail space, medical facilities, multi-family rental housing, warehouses, etc. as well as manufacturing or industrial use.  The states will determine who receives the bond allocations and for what projects.

 

2.   50 Percent First Year Depreciation of New Construction and Rehabilitation.  Those who do not utilize tax exempt bond financing now have the ability to expense half (50 percent) of the cost of the buildings constructed and/or half (50 percent) of the reconstruction cost of buildings in the GO Zone with the remaining 50 percent depreciated as normal.  This is a deduction for both regular tax and AMT.

 

3.   50 Percent First Year Depreciation for Equipment.  Additional first year depreciation of 50 percent of the purchase price of equipment used in a trade or business in the GO Zone with the remaining 50 percent depreciated as normal.  This is a deduction for both regular tax and AMT.

 

4.   50 Percent Expensing of Demolition Costs.  The expensing of 50 percent of otherwise capitalized demolition or clean-up costs within the GO Zone.

 

5.   Remediation Expensing.  The expensing of environmental remediation costs inside the GO Zone, including clean-up of petroleum products.

 

6.   Rehabilitation Tax Credit.  Rehabilitation tax credit increase from 10 percent to 13 percent for pre-1936 buildings and from 20 percent to 26 percent for historic properties within the GO Zone.  If the credit is taken, the depreciation must be straight line or under the alternative depreciation system.




 

 

 

7.   Low Income Housing Credit.  Increase in low income housing credit allocated to the GO Zone for qualifying housing projects.  What constitutes a qualifying housing project is significantly liberalized.  For non-metropolitan areas, median income redefined from the area median gross income to the national non-metropolitan area median gross income.  The credit is increased by permitting the use of 130 percent rather than 100 percent of otherwise eligible basis.

 

8.   New Markets Tax Credit.  Increase in allocation of New Markets Tax Credit for the GO Zone for qualified Community Development Entities with a significant mission related to the recovery and redevelopment of the GO Zone.  This is an incentive for capital investment in GO Zone businesses which provides tax credits over seven (7) years equal to 39 percent of the investment.

 

9.   Enhanced NOL.  Net operating losses caused by the Katrina destruction, the additional First Year Depreciation, Expensing, and certain other costs are subject to a special five-year net operating loss carry-back.

 

  1. Increase Expensing for Business.  Normally, businesses are able to expense up to $108,000 in new machinery and equipment if the business is acquiring less than $430,000 of machinery and equipment during the year.  In the GO Zone, businesses can expense up to $208,000 in new machinery and equipment even if the business is acquiring up to $1,030,000 in total.  This applies to machinery and equipment placed in service before 2008.

 

  1.  Extend the Work Opportunity Tax Credit (WOTC) to cover Hurricane Katrina employees.  The target group is comprised of individuals who, prior to the hurricane, lived in the GO Zone.  Employers located in the GO Zone may claim the WOTC for Hurricane Katrina employees hired over the next two years.  The credit is 40% of the first $6,000 of wages paid to new employees.

 

  1. Provide an employee retention tax credit through the end of the 2005 calendar year.  To encourage employers to retain eligible employees on their payroll, the tax credit is 40% of the first $6,000 of wages paid to the employee between August 28, 2005, and December 31, 2005 while a business was inoperable as a result of damage sustained by Hurricane Katrina.  The credit is not affected if the employee reports to work at another location while the business was inoperable. 

 

For more information, call John Scott at 601.949.8651 or email him at john.scott@horne-llp.com