Gulf Coast Recovery is Ready to Go

Hurricane Katrina GO Zone Incentives

March 2006

By Dr. C.R. "Buzz" Canup, President of Site Selection

AngelouEconomics

Legal Analysis By: Steve Rosenblatt, Barry Cannada and John England
Attorneys with Butler, Snow, O’Mara, Stevens & Cannada

In late August 2005, the southeastern coastal states of Mississippi, Louisiana and Alabama were barraged with one of the most devastating and deadly storms ever to hit the United States. Months later, these Southern states are still digging out from the physical and fiscal harm imposed by Mother Nature, better known as Hurricane Katrina. Fortunately, they aren’t alone in their recovery efforts thanks to several Congressional relief bills, among them one of the most powerful recovery tools ever available for states dealing with the effects of widespread disasters.

The Gulf Opportunity Zone Act of 2005, signed into law by President Bush on December 21, 2005, contains significant economic incentives to rebuild the Gulf Coast, as well as to attract new investments to the affected areas. Modeled after the New York Liberty Zone incentives created for parts of lower Manhattan after the 9-11 disaster, these incentives are intended to stimulate rapid, private investment within the Gulf Opportunity Zone (GO Zone) within the window of time provided. These economic incentives are so significant that any business considering an investment in any new, replacement or expanded operations, buildings or equipment within the GO Zone should consider how to employ these incentives to the fullest extent possible.

Listed below is a synopsis of the GO ZONE’s most significant incentives:

Benefits available under the gulf
opportunity zone act of 2005 and state incentives

50% 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% 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% bonus depreciation is available for both costs incurred on new projects and 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.

5-Year Net Operating Loss (NOL) Carryback

Recognizing that the deductions generated by the 50% 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 2 years to 5 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% 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% of the purchase price.

A project must choose between bonus depreciation and tax-exempt bonds on project costs that otherwise would qualify for both incentives. Additionally, GO Zone 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.

Use Of Tax-Exempt, Private Activity Go Bonds Permit Use Of Additional State-Law Incentives In Mississippi

If properly structured, projects financed with tax-exempt GO Bonds can be exempt from the sales and use tax (generally 7%) and, with proper planning, can avoid a portion of the contractor’s tax (the 3½% tax on component materials and on design services). Also, projects financed with GO Bonds are eligible to obtain ad valorem tax exemptions, subject to the discretion of the local governing body where the project is located. Finally, businesses utilizing tax-exempt GO Bonds may also be eligible for RED Program state income tax credits. These three state-law incentives can produce significant savings, especially when combined with the savings of the cost of funds for a tax-exempt, private activity bond.

Other Benefits Offered By The Go Zone Act

100% Deduction for Qualifying Tangible Personal Property for Small Businesses

The amount small businesses are permitted under Section 179 to expense, rather than depreciate, for investments in qualifying tangible personal property and computer software placed in service in the Zone has been increased by $100,000 to $208,000. The placement in service dates are the same as those that apply to bonus depreciation. The investment ceiling limit for eligible property has been increased by $600,000 to $1,030,000.

Demolition and Cleanup Expenses May Be Expensed
Under existing law, the cost of demolition generally is added to the business owner’s basis in the underlying land and cannot be recovered until the property is sold. The GO Zone Act allows businesses to expense 50% of their demolition and cleanup expenses incurred through 2007.

Special Incentives for Employers

• Work Opportunity Tax Credit (WOTC). Employers may claim the work opportunity tax credit (WOTC) if they hire a new “Hurricane Katrina employee.” This is an individual who, on August 28, 2005, had a principal place of abode in the “core disaster area” and (1) who is hired after August 27, 2005, and before August 28, 2007, for a job located in the core disaster area; or (2) who was displaced by Hurricane Katrina and is hired after August 27, 2005, and on or before December 31, 2005 for a job located outside the core disaster area. For employers outside the GO Zone, the employee must have been hired after August 27, 2005, and before January 1, 2006. For employers within the GO Zone, the WOTC is extended for employees hired through August 27, 2007. Eligible employers are allowed a credit of 40% of the first $6,000 of qualified first-year wages paid to each eligible employee.

• Employee Retention Tax Credit. The Employee Retention Tax Credit was expanded to apply to all employers in the Zone, regardless of the number of employees. The credit is equal to 40% of qualifying wages up to a subject to a maximum of $6,000 (for a maximum credit of $2,400 per qualifying employee) and applies to qualifying amounts expended prior to December 31, 2005.

Other Important Provisions of the GO Zone Act
The GO Zone Act contains a number of additional incentives and relief provisions that are important to businesses considering an investment in the GO Zone, including:

• Increase in Qualified Rehabilitation Credit: The credit for qualified expenditures for a historic structure was raised to 26% and for other qualified structures to 13%.

• Expensing of Qualified Environmental Clean-up Costs: The deductibility of environmental clean up costs incurred on qualifying sites was extended for 2 years and applies to the clean up of petroleum products. To qualify, costs must be incurred from August 27, 2005 through December 31, 2007.

• New Market Tax Credit Authority Increased: The allowable credit is equal to 39% of qualifying investments in low-income communities. To qualify, the investment must be made by an authorized community development entity (CDE). An additional $1 Billion in authority was granted for the years 2005-2007.

• Low Income Housing: The Act authorizes almost $40 Million in additional low-income tax credits for Mississippi. Additional provisions will increase the credits available to investors for new construction and rehabilitation expenditures.

• Reforestation Incentives for Small Timber Owners: The cap on the deductibility of reforestation costs was doubled to $20,000 per year through 2008, and a special 5-year NOL carryback for small timber operations was authorized. To qualify, the timber owner must own less than 500 acres of timber.

The Go Zone

Counties in Mississippi
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
Counties in Alabama
Baldwin, Choctaw, Clark, Greene, Hale, Marengo, Mobile, Pickens, Sumter, Tuscaloosa, and Washington
Parishes in Louisiana
Acadia, Ascension, Assumption, Calcasieu, Cameron, East Baton Rouge, East Feliciana, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Orleans, Plaquemines, Pointe Coupee, St. Bernard, St. Charles, St. Helena, St. James, St. John the Baptist, St. Martin, St. Mary, St. Tammany, Tangipahoa, Terrebonne, Vermilion, Washington, West Baton Rouge, and West Feliciana

This legal analysis was prepared by one of the Mid-South’s most prominent legal firms, Butler, Snow, O’Mara, Stevens & Cannada. Butler Snow is one of the largest law firms in the Mid-South and has been a leading presence in the Southeastern legal community since 1954. Butler Snow represents clients in the southeastern region and the nation concerning significant business and litigation matters across a diversified group of industry sectors. Offices are located in Jackson and Gulfport, Mississippi and in Memphis, Tennessee. Butler Snow offers clients a full range of legal services. For more information concerning Butler Snow or GO ZONE legislation, go to www.butlersnow.com.