Like a glistening jewel in the hurricane redevelopment incentives passed by Congress last month lies the vital spark of the newly created Gulf Opportunity (GO) Zone.
Covering 40 Mississippi counties affected by Hurricane Katrina, which struck the Mississippi Gulf Coast on August 29, the GO Zone Act of 2005 will help businesses rebuild and expand, and attract new investment and new businesses. The new law contains more than a dozen Katrina-related tax incentives for the GO Zone, defined as that portion of the Katrina disaster area determined by President Bush to warrant individual assistance from the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
“The new law makes businesses throughout the hurricane-stricken zone eligible for many tax incentives designed to encourage businesses to reinvest in facilities and rehire Mississippi workers,” said U.S. Sen. Trent Lott. (R-Miss.) “It helps our cities restructure their debt and increase the coast’s housing supply.”
Jay Norris, an attorney with Copeland, Cook Taylor & Bush, P.A., in Ridgeland, hailed the GO Zone Act as “historic in size and impact.”
“Because of the devastation of Katrina, the legislation provides a 50% bonus first-year depreciation allowance to taxpayers located in counties across South and Central Mississippi,” he said. “What makes this law significant is the availability of the bonus depreciation not just for personal property, but also for nonresidential real property and residential rental property. Further, the new legislation allows taxpayers in the affected counties to expense a significant amount of the costs of purchasing needed business assets and the costs of clean up. The benefits of the act will certainly help take the sting out of making unplanned expenditures such as clean up, rebuilding and the replacement of necessary assets.”
Tax Exempt Bonds
Mississippi may issue up to nearly $5 billion in tax-exempt, private activity bonds before January 1, 2011, to finance the development of a wide array of commercial projects. The bond proceeds may be used to fund the acquisition, construction and renovation of nonresidential real estate and some residential rental property. The tax-exempt status should result in savings of up to 200 basis points in interest costs per annum.
“This provision is one of the most significant of the act, as it allows existing and new Mississippi businesses to benefit from tax-exempt financing that they would not otherwise be entitled to benefit from,” said Steve Edds, a tax attorney for McGlinchey Stafford, PLLC, in Jackson. “For example, hotels, large manufacturing facilities, commercial developments and office buildings cannot currently be financed with tax-exempt debt, but will be able to under the act.”
50% Bonus Depreciation
Applicable to most types of qualifying depreciable real and personal property, this tax benefit applies to rehabilitation costs and expenses incurred on new projects. To qualify, eligible property must be placed in service on or before Dec. 31, 2007, or by Dec. 31, 2008, if it is non-residential real estate or residential rental property. Even though gaming property is excluded, ancillary facilities and related equipment may qualify.
“The two biggest incentives under the act are the tax-exempt bond provisions and the 50% bonus depreciation, but the issue is that you can’t take both,” said John England, a member of Jackson-based Butler Snow’s public finance group. “You must choose, and consulting with an accountant or tax attorney will help you decide which is more beneficial.”
Increase in Section 179 Expense
Under Section 179 of the Internal Revenue Code, the maximum allowable deduction for qualifying tangible personal property and computer software placed in service in the zone has increased from $100,000 to $200,000.
“In lieu of depreciation, a federal taxpayer with a sufficiently small amount of annual investment may elect to deduct, or expense, such costs,” said Edds. “The act doubles the amount for qualifying expenditures made in the zone through Dec. 31, 2007. In addition, this provision increases the level of investment at which these benefits apply to $1 million. Under current law, the maximum investment is $400,000.”
Net Operating Loss (NOL) Carryback
The carryback period for net operating losses incurred by businesses with pre-existing operations in the GO Zone was extended to five years.
Qualifying losses include certain in-zone casualty losses, moving expenses, temporary housing expenses, and depreciation deductions concerning qualified zone property and repair expenses resulting from Katrina. They may be used to offset up to 100% of income subject to the alternative minimum tax.
Special Employer Incentives
The Employee Retention Tax Credit was expanded to include all employers in the zone, regardless of size. The credit equals 40% of qualifying wages up to maximum credit of $2,400 per qualifying employee. This credit applies to qualifying amounts spent prior to December 31, 2005.
“Qualified employees may exclude from gross income up to $600 per month for employer-provided lodging located in the zone,” said England. “In addition, employers receive a credit for 30% of the tax-free lodging benefit. This provision applies to lodging benefits provided during the six-month period from and after enactment.”
Other important provisions
The legislation contains a number of additional incentives and relief provisions important to businesses considering making an investment in the Mississippi Gulf Coast, including:
• Advance refunding authority
• Increase in qualified rehabilitation credit
• Expensing rules for demolition and clean-up
• Increase in new market tax credit authority
• Reforestation incentives for small timber owners
• Low-incoming housing
• Expensing of qualified environmental clean-up costs
Each provision of the bill has its own time period. Several provisions relate to expenses paid or incurred after August 27, 2005, and before January 1, 2008, Norris pointed out.
Contact MBJ contributing writer Lynne W. Jeter at email@example.com.