Background
In Sept 2005 the White House made a press release stating that President Bush
was pushing for more changes in tax incentives to benefit victims of hurricanes
that hit the south in 2005. In Sept of 2005 the Katrina Emergency Tax Relief
Act became effective and in Dec 2005 President Bush signed H.R. 4440 as amended
by the Senate into law. It was called “The Gulf Opportunity Zone Act of 2005”.
Recently the IRS came out with Notice 2006-67 that clarifies how to claim the
50% depreciation provision which is one of the 20 or so provisions of the bill.
It also completed Publication 4492 in English and Spanish entitled “Information
for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. The purpose of
this handout is to explore the First Year 50% Bonus Depreciation provision of
H.R. 4440 from several sources: the law itself, the IRC tax code, RIA
commentary, IRS Notices and Publications, and FEMA maps.
Richard Dance 1031 Exchange Coordinators. August 2006
IRS Notice 2006-67
In Notice 2006-67, 2006-33 IRB the IRS issued detailed guidance on the 50% bonus
depreciation allowance for eligible Gulf Opportunity (GO) Zone property,
including when assets qualify for a key active business conduct requirement, how
to figure the bonus depreciation when property is used for qualifying and
disqualifying purposes, and the mechanics of claiming (or electing out of) the
bonus first year depreciation allowance.
What is the Additional Depreciation Allowance?
The allowance is an additional deduction of 50% of the property’s depreciable
basis (after any section 179 deduction but before figuring your regular
depreciation deduction). The special allowance applies only for the first year
the property is placed in service. The allowance is deductible for both the
regular tax and the alternative minimum tax (AMT). There is no AMT adjustment
required for any depreciation figured on the remaining basis of the property.
What are the Requirements for the 50% First Year Depreciation?
Property that meets all of the following requirements:
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It falls into one of these categories:
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Tangible property depreciated under MACRS
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Computer software that is readily available for purchase by
general public
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Water utility property
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Qualified leasehold improvement property
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Nonresidential real property and residential rental property
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Substantially all of the use of the property is:
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in the GO Zone (areas in the Gulf states hit hardest by Hurricanes
Katrina, Rita, or Wilma.) and
- the active conduct of the taxpayer's trade or business
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Acquired by purchase between Aug 27, 2005 and Dec 31, 2008 for real property,
all else before Dec 31, 2007. (Code Sec. 1400N(d)(2) ) This was extended in a
recent law to December 31, 2010.
Gulf Opportunity Zone (GO Zone) for Katrina only.
Alabama counties: Baldwin, Chocktaw, Clarke, Greene, Hale, Marengo, Mobile, Pickens,
Sumter, Tuscaloosa, and Washington Counties;
Louisiana parishes: Acadia, Ascension, Assumption, Calcasieu, Cameron, East Baton Rouge,
East Feliciana, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche,
Livingston, Orleans, Pointe Coupee, Plaquemines, St. Bernard, St. Charles, St. Helena,
St. James, St. John the Baptist, St. Mary, St. Martin, St. Tammany, Tangipahoa, Terrebonne,
Vermilion, Washington, West Baton Rouge and West Feliciana; and
Mississippi counties: Adams, Amite, Attala, Claiborne, Choctaw, Clarke, Copiah, Covington,
Forrest, Franklin, George, Greene, Hancock, Harrison, Hinds, Holmes, Humphreys, Jackson,
Jasper, Jefferson, Jefferson Davis, Jones, Kemper, Lamar, Lauderdale, Lawrence, Leake,
Lincoln, Lowndes, Madison, Marion, Neshoba, Newton, Noxubee, Oktibbeha, Pearl River, Perry,
Pike, Rankin, Scott, Simpson, Smith, Stone, Walthall, Warren, Wayne, Wilkinson, Winston and
Yazoo.
Additional GO Zones for Rita and Wilmas
The additional hurricanes added a few additional counties to the states above and then some in Florida and Texas.
What is Active Conduct of Business?
For purposes of the active conduct of a trade or business requirement, a taxpayer generally
is considered to actively conduct a trade or business if he meaningfully participates in the
management or operations of the trade or business. A partner, member, or shareholder of a
partnership, limited liability company, or S corporation, respectively, is considered to
actively conduct a trade or business of the entity if the entity meaningfully participates
(through the activities performed by itself, or by others on behalf of the entity in the
management or operations of the trade or business). Similar rules apply to other pass-thru
entities such as trusts or estates.
Property ineligible if used for prohibited activities.
The 50% bonus first-year depreciation allowance can't be claimed for:
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Property used more than 10% in connection with: a private or commercial golf course;
massage parlor; hot tub or suntan facility; any store the principal business of which is
the sale of alcoholic beverages for consumption off premises; or
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Gambling or animal racing property, including assets used directly in connecting with
these activities or their on-site viewing, and buildings or portions of buildings
dedicated to these activities or their on-site viewing (unless the portion so dedicated
is less than 100 square feet). (Code Sec. 1400N(p)(1) , Code Sec. 1400N(p)(3) )
Property also is ineligible for 50% bonus first-year depreciation if:
The 50% bonus first-year depreciation allowance can't be claimed for:
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Any portion of it is financed with the proceeds of a tax-exempt obligation under Code Sec. 103
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It must be depreciated under the alternative depreciation system (ADS)
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It is listed property (such as a passenger auto) that isn't used more than 50% for business; or
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It is a qualified revitalization building under Code Sec. 1400I
How to Elect Out of Additional Depreciation
An election not to deduct GO Zone bonus first year depreciation for any class of property that
is GO Zone property placed in service during the tax year must be made by the due date
(including extensions) of the return for the tax year in which the GO Zone property is
placed in service by the taxpayer. The election must be made as prescribed on Form 4562
(Depreciation and Amortization), and its instructions.
What is the new IRS Publication on the Subject?
The IRS has provided an explanation of KETRA and the GO Zone Act in Publication 4492, Information
for Taxpayers Affected by Hurricanes Katrina, Rita and Wilma, which is available at
http://www.irs.gov/pub/irs-pdf/p4492.pdf.
