In late August 2005, the Southeastern coastal states of Mississippi, Louisiana, and Alabama were barraged by one of the most devastating and deadly storms ever to hit the United States. Months later, these states are still digging out from the physical and fiscal harm imposed by Hurricane Katrina. Fortunately, they aren't alone in their recovery efforts, thanks to several Congressional relief bills, among them one of the most powerful ever created for states dealing with the effects of widespread disasters.
These recovery tools are designed to assist existing business and industry in recovering from damage caused by Katrina. They are also designed to attract new business and industry to the region through attractive and accelerated incentives. With such widespread physical destruction throughout the region and the loss of thousands of businesses, these incentives are vital to assist the region in economic recovery and employment stabilization.
It is important to note that there has already been significant recovery in many of the areas impacted. Electricity has been restored to all areas capable of receiving it. Telephone and Internet access have been reconnected in most areas. Significant efforts are underway to provide both temporary and permanent housing. And infrastructure is being repaired, reconstructed, and relocated to provide critical services. Significant analysis and evaluation has already been conducted, and additional studies, plans, and strategies are currently under development - all designed to help individuals, businesses, and industries return to stability and growth as soon as possible.
The Gulf Opportunity Zone - or "GO Zone" - Act, signed into law by President Bush on December 21, 2005, contains significant economic incentives to rebuild the Gulf Coast and to attract new investments to the affected areas. Modeled after the New York Liberty Zone incentives created for parts of lower Manhattan after 9/11, these incentives are intended to stimulate rapid private investment in the GO Zone within the window of time provided. These economic incentives are so significant that any business considering an investment in new, replacement, or expanded operations, or buildings or equipment within the GO Zone should consider how to employ these incentives to the fullest extent possible.
The GO Zone incentives have been written in a manner to help make them easy to understand and to implement. However, parties interested in the incentives should be aware that there are time limitations under which a qualifying entities must make application and complete their new or expanded investments. The incentives are aggressive, high impact, and designed for immediate benefit to those who qualify.
The paragraphs to follow include an analysis of the GO Zone incentives, prepared by Steve Rosenblatt, Barry Cannada, and John England, attorneys with Butler, Snow, O'Mara, Stevens & Cannada, a law firm with offices in Mississippi and Tennessee. Any business or industry considering a new location in the Southeast should take a serious look at the GO Zone incentives and determine how they may provide immediate impact.
Fifty Percent Bonus Depreciation
The GO Zone Act allows for a significant acceleration of the normal depreciation deduction by allowing a bonus depreciation deduction, in the first year qualified GO Zone property is placed in service, equal to 50 percent of its cost, in addition to the normal depreciation deduction for the balance of such costs. This benefit is available to businesses of all sizes, and there is no dollar cap on the total amount of bonus depreciation that can be claimed.
The bonus depreciation can be used for investments in qualified GO Zone property, which must meet the following four elements: (1) eligible property - generally equipment, non-residential real property, or residential rental property; (2) "substantially all" of the use of which is in an "active trade or business" in the Go Zone; (3) the original use of which began in the GO Zone on or after August 28, 2005; and (4) which was acquired by "purchase" for which there was no "written binding contract" for its acquisition in effect before August 28, 2005. The window of opportunity for using the bonus depreciation is narrow: qualified GO Zone property must be placed in service by December 31, 2007 for personal property and on or before December 31, 2008 for real property.
The 50 percent bonus depreciation is available for both costs incurred on new projects and for rehabilitation costs. (Costs incurred for replacement, renovation, or rehabilitation of existing property are treated as separate property for purposes of the GO Zone Act.) Opt-outs of bonus depreciation allowance are permitted by asset class.
There are some restrictions on the use of bonus depreciation. If any portion of property is financed with tax-exempt bonds, that entire property is ineligible for bonus deprecation. Gaming property is excluded, as is property used in connection with any private or commercial golf course, country club, or liquor store. Recapture provisions apply if the property ceases to be qualified GO Zone property, usually because it is sold or because it is moved out of the GO Zone. The use of the deductions afforded by bonus depreciation also remains subject to the normal limitations found in the "at-risk" and "passive activity" rules.
Five-Year Net Operating Loss (NOL) Carryback
Recognizing that the deductions generated by the 50 percent bonus depreciation may exceed current year income, Congress expanded the opportunity for businesses in the GO Zone to carry back their net operating losses. The time period for the NOL carryback was extended from two years to five years, and businesses may carry forward NOLs for up to 15 years. This may enable a business to convert operating losses into refunds for taxes previously paid.
Qualifying losses may be used to offset up to 100 percent of income subject to the Alternative Minimum Tax. Qualifying losses include: (1) depreciation deductions with respect to qualified Zone property; (2) in-Zone casualty losses; (3) moving expenses; (4) temporary housing expenses; and (5) repair expenses resulting from Katrina.
Tax-Exempt, Private-Activity "GO Bonds"
Tax-exempt, private-activity bonds have now been authorized to finance development of a wide array of commercial projects in the Zone on or after August 28, 2005. Mississippi may issue in excess of $4.9 billion in tax-exempt "GO Bonds," while Louisiana may issue nearly $7.9 billion, and Alabama may issue in excess of $2.1 billion. These bonds are available to most business sectors, but gaming and certain other activities discussed above are excluded. Bond proceeds may be used to fund construction and renovation of nonresidential real property and certain residential rental property (movable fixtures and equipment are excluded). For new acquisitions of existing property to qualify, improvements must be made to the property in an amount not less than 50 percent of the purchase price.
A project must choose between bonus depreciation and tax-exempt bonds on costs that otherwise would qualify for both incentives. Additionally, GO Bonds must be issued on or before December 31, 2010. Under current federal tax law, borrowers may use bond proceeds to reimburse for costs previously incurred by the borrower for only 60 days prior to initial approval by the governmental authority issuing the bonds.