07/ 28/ 2006
by Kay Bell
Rebuilding of the Gulf Coast in the wake of 2005's unprecedented hurricane season continues, and businesses that have returned to or decided to invest in the hardest-hit areas are getting some encouragement from the Internal Revenue Service.
Numerous tax breaks, such as increased expensing write-offs and added depreciation deductions, are available for companies that reopen their doors or set up a new shop in a Gulf Opportunity Zone, commonly referred to as a GO Zone.
There are three GO Zones comprised of counties, or parishes in the case of Louisiana, that sustained extensive damages from one of the three major hurricanes—Katrina, Rita and Wilma—that struck the Gulf Coast last year.
Your first step in claiming any of the special Zone tax breaks is confirming that your business qualifies on the basis of its location.
The first designated GO Zone was created following Hurricane Katrina and covers 31 Louisiana parishes, 11 Alabama counties and 49 Mississippi counties hit the hardest by that storm. The Rita GO Zone covers 29 parishes, some of which are also in the Katrina zone in Louisiana, as well as 22 counties in southeast Texas. Eleven Florida counties compose the Wilma GO Zone.
The specific jurisdictions are listed in IRS Publication 4492, which is available online or in a downloadable PDF (107 KB).
In most cases, the GO Zone tax incentives are available to any business that wants to invest in the storm-damaged Gulf Coast. Your company did not have to be operating in the region previously to qualify.
And while businesses in each of the three GO Zones are eligible for the same hurricane-related tax benefits, the effective starting dates may vary based on when the storms struck, when a federal disaster declaration was issued or how the dates are specifically stated in the legislation. When claiming GO Zone benefits, be sure to check the appropriate IRS forms and publications for the exact eligibility dates for your affected area.
Once you determine that your business is eligible for GO Zone benefits, it's time to look at which specific tax savings you can claim. Here are some of the more popular provisions.
Increased business expensing
Small businesses can deduct up to $200,000 worth of qualifying property put to use in a GO Zone. This is double the amount of Section 179 expensing generally allowed. The investment phaseout level has also increased from $400,000 to $1 million, making this benefit available to more small businesses that are spending large sums to get their companies operating in the damaged Gulf Coast region.
Special bonus depreciation
Any GO Zone business, regardless of size, can take a special first-year depreciation deduction equal to 50 percent of the property's depreciable basis. This includes computer software, leasehold improvements and covered property with a recovery period of 20 years or less that is placed in service through December 2007. In the case of real property, i.e., real estate, the in-service date extends through Dec. 31, 2008.
Net operating loss (NOL) carryback extension
The GO Zone law allows a business to carry back qualified NOLs five years instead of the normal two. This provision should enable some businesses to obtain a refund of taxes paid in earlier tax years. An additional timber expensing/carryback provision is also available to small timber producers (fewer than 500 acres) whose enterprises were devastated by Hurricane Katrina, Rita or Wilma.
Cleanup costs deduction
Businesses can deduct 50 percent of what they pay to demolish unusable property and/or clean up storm debris in a GO Zone. These costs, which normally would be required to be included in the basis of the property, qualify as long as they are paid or incurred by Dec. 31, 2007.
Employee assistance credits
A new tax credit was created to reward GO Zone employers who hired or continued to pay their workers in the wake of the storms. This credit is available only to businesses that were operating in the zones prior to the storms and also covers wages paid, even if your employees did not perform any services for a period or because of storm-related conditions worked at a location that was not your principal place of business.
You can claim 40 percent of the qualified wages paid to each eligible employee, up to a maximum of $6,000 per worker. Details and effective dates for each GO Zone can be found on Form 5884-A (64 KB, PDF).
If you provided your workers help in paying for post-hurricane lodging (up to $600 per month per employee is allowed), on that same form your company can claim a tax credit for up to 30 percent of those payments ($180 per month per subsidized employee).
Complete GO Zone benefits can be found in IRS Publication 4492 and at the IRS Web site.
