KATRINA/GULF ZONE-RELATED CHANGES FROM 2006 ACTS

by J. Kenneth Nowell, CPA

WARNING - THIS IS NOT A COMPLETE LIST OF SAID CHANGES TO THE TAX LAWS, ONLY THOSE THAT THE AUTHOR FOUND INTERESTING.

First, you are probably wondering...why do we care?  Most of our readers are in the Northeast, far from the devastation zone.  But investment opportunities know no geographical bounds.  Some of the following provisions may be giving rise to investment opportunities for clients in this area (of course there's no guarantees that the tax advantages will make the investment a sound one...in fact, I personally do not pursue an investment unless it makes sense from a pure economic standpoint).

1. Housing for Katrina victims

You can claim a deduction if you house individuals displaced by Hurricane Katrina.  The deduction is $500 per person, for up to four people housed by you.  All that is required is as follows:

• You house someone who resided in the Core Disaster Area on 8/28/05, or someone who lived in the HKDA (Hurricane Katrina Disaster Area) and was displaced due to damage or an imposed evacuation from the storm.

• You housed the person(s) rent-free for 60 or more consecutive days.  The tax year in which you can claim the deduction (2005 or 2006) is the year that contains the date when the 60-day period ends.  If you have qualifying periods in both years, YOU CAN ONLY CLAIM IT IN ONE OF THE YEARS.

• The qualifying displaced person cannot be your spouse or dependent.  But other relatives may qualify.

2. Enhanced rates for charitable mileage

Auto mileage incurred for Katrina-related relief purposes from 8/25/05 through 12/31/06 is deductible at the rate of 70% of the deductible business rate, with fractions of cents rounded up (29 cents 8/25-8/31/05, 34 cents 9/1-12/31/05 and 32 cents for all of 2006).

3. Several other benefits for displaced persons

Displaced persons can distribute up to $100,000 from retirement plans without penalty (but still subject to tax), and can borrow up to 100% of their retirement plan balance (if the plan document allows for loans), subject to a $100,000 limit.  These must be done prior to 1/1/07. 

Said persons are also subject to additional relief from tax on discharges of indebtedness between 8/25/05 and 12/31/06.

4. The Gulf Opportunity Zone Act of 2005

Here's a quick catalog of the benefits available to businesses or property investments in the "GO Zone."

• 50% depreciation allowance for the first year MACRS property with a recovery period of 20 years or less is placed in service.

• An additional $100,000 in available Section 179 deduction, and an additional $600,000 in the assets placed in service threshold (presently $430,000) beyond which the deduction allowed phases out.

• A 50% immediate deduction for clean-up costs that otherwise would be subject to capitalization.

• A 5-year Net Operating Loss carryback (instead of 2 years) allowed to the extent the loss comes from:

  • Hurricane casualty losses.

  • Moving expenses between 8/28/05 and 12/31/07 for qualified employees.

  • Expenses paid for temporary housing of employees of businesses in the GO Zone.

  • Depreciation deductions allowed for GO Zone property (see the top item above).

  • Repair expenses pertaining to GO Zone property between 8/28/05 and 12/31/07.

• An increased rehabilitation credit for historic structures effective from 8/28/05 and 12/31/08.

• Income exclusion (for employees) and tax credit (for employers) for up to $600 per month in value of in-kind lodging furnished by an employer.

• Increased Hope and Lifetime Learning Credits for Students attending institutions in the GO Zone.

• Extension of Katrina Emergency Tax Relief Act provisions to those affected by Hurricanes Rita and Wilma.