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previous page Previous Page: Publication 954 - Tax Incentives for Empowerment Zones and Other Distressed Communities - Enterprise Communities
next page Next Page: Publication 954 - Tax Incentives for Empowerment Zones and Other Distressed Communities - New Markets Credit
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication
taxmap/pubs/p954-004.htm#TXMP62542e8a

New York Liberty Zone


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New York Liberty Zone

The tax incentives described below apply to the parts of New York City damaged in the terrorist attack on September 11, 2001. This area is referred to as the New York Liberty Zone.
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Area defined.


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The New York Liberty Zone is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway) in the Borough of Manhattan.
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New York Liberty Zone Business Employee Credit


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previous topic occurrence Liberty Zone next topic occurrence

The New York Liberty Zone business employee credit is part of the work opportunity credit (discussed later). You can claim the credit if you pay or incur "qualified wages" to a "Liberty Zone business employee." The credit is for wages paid or incurred to new and existing employees for work performed during 2002 or 2003.
Caution
This credit is set to expire for wages paid to employees for work performed after 2003. However, at the time this publication was issued, Congress was considering legislation that would allow this credit with respect to work performed by qualified employees during 2004. See What's Hot in Tax Forms, Pubs, and Other Tax Products at www.irs.gov/formspubs to find out if this legislation was enacted.
The credit is 40% (25% for employees who worked for you at least 120 hours but fewer than 400 hours) of the qualified wages for the year. The amount of the qualified wages you can use to figure the credit cannot be more than $6,000 for each employee for each calendar year. As a result, the credit can be as much as $2,400 (40% of $6,000) for each employee each year.
taxmap/pubs/p954-004.htm#TXMP7484e4ff

Liberty Zone business employee.


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A Liberty Zone business employee is generally any employee who performs 80% or more of his or her services:
  1. In the Liberty Zone (defined earlier), or
  2. Elsewhere in New York City for a business that relocated from the Liberty Zone due to the destruction or damage of its place of business by the September 11, 2001, terrorist attack.
taxmap/pubs/p954-004.htm#TXMP3c5093fd

Limit on number of employees located outside the Liberty Zone.
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The number of employees described in (2) above that are treated as Liberty Zone business employees on any day is limited to the excess of:
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Limit for large businesses.
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You cannot claim the credit for any tax year in which you employed an average of more than 200 employees on business days during the tax year.
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Qualified wages.


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Qualified wages are wages you pay or incur to a Liberty Zone business employee (defined earlier) for work performed during 2002 or 2003. Wages are generally defined as wages (excluding tips) subject to the Federal Unemployment Tax Act (FUTA) without regard to the FUTA dollar limit, but not more than $6,000 each calendar year for each employee. Qualified wages for any employee must be reduced by the amount of any work supplementation payments you received under the Social Security Act.
taxmap/pubs/p954-004.htm#TXMP5237d35b

Nonqualified wages.
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See Form 8884 for a complete list of wages that do not qualify for the credit. Some of the most common wages that do not qualify include wages you pay or incur to an employee who:
  1. Does not work for you at least for 120 hours, or
  2. Is your relative or dependent.
taxmap/pubs/p954-004.htm#TXMP76098543

Claiming the credit.


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Use Form 8884 to claim this credit.
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Effect on work opportunity credit and welfare-to-work credit.
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Wages you use to figure this credit cannot be used to figure the work opportunity credit or welfare-to-work credit.
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Effect on salary and wage deduction.
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In general, you must reduce the deduction on your income tax return for salaries and wages by the amount of your current year credit (before applying the tax liability limit).
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More information.


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For more information about this credit, see Form 8884.
taxmap/pubs/p954-004.htm#TXMP18b5276e

Special Liberty Zone  
Depreciation Allowance


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Special Liberty Zone Depreciation Allowance

You can take a special Liberty Zone depreciation allowance for qualified Liberty Zone property you place in service during the tax year. The allowance is an additional 30% deduction and it applies for the year you place the property in service. You can take the additional 30% deduction after any section 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service. To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property.
The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. There is no AMT adjustment required for any depreciation figured on the remaining basis of the property.
You can claim the allowance only for the year the property is placed in service. In the year you claim the allowance, you must reduce the basis of the property by the allowance before figuring the regular depreciation deduction.
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Special depreciation allowance.


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A special 30% or 50% depreciation allowance is allowed for qualified property placed in service after September 10, 2001, and before 2005 (2006 in certain cases), even if not in the Liberty Zone. If you place in service property that is eligible for that allowance, you cannot claim the special Liberty Zone depreciation allowance for the same property.
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Qualified Liberty Zone property.


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Property qualifies for the special Liberty Zone depreciation allowance if it meets all the following requirements.
  1. It is one of the following types of property.
    1. Property depreciated under MACRS with a recovery period of 20 years or less.
    2. Water utility property.
    3. Computer software that is not a section 197 intangible as described in Publication 946. (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS.)
    4. Certain nonresidential real property and residential rental property (defined later).
  2. It meets all the following tests (explained later under Tests to be met).
    1. Acquisition date test.
    2. Placed in service date test.
    3. Substantial use test.
    4. Original use test.
  3. It is not excepted property (explained later under Excepted property).
Property described in 1(a), 1(b), 1(c), generally qualifies for the special Liberty Zone depreciation allowance only if it is used property. That is because, if it is new, it may qualify instead for the special depreciation allowance described earlier under Special depreciation allowance. However, property does not qualify for that special depreciation allowance unless it is acquired and placed in service before 2005 (2006 in certain cases). Property acquired or placed in service at a later date may qualify for the special Liberty Zone depreciation allowance, even if new.
taxmap/pubs/p954-004.htm#TXMP54f1f7f3

Nonresidential real property and residential rental property.


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This property is qualifying property only to the extent it rehabilitates real property damaged, or replaces real property destroyed or condemned, as a result of the terrorist attack of September 11, 2001. Property is treated as replacing destroyed or condemned property if, as part of an integrated plan, such property replaces real property included in a continuous area that includes real property destroyed or condemned.
For these purposes, real property is considered destroyed (or condemned) only if an entire building or structure was destroyed (or condemned) as a result of the terrorist attack. Otherwise, the property is considered damaged real property. For example, if certain structural components of a building (such as walls, floors, or plumbing fixtures) are damaged or destroyed as a result of the terrorist attack, but the building is not destroyed (or condemned), then only costs related to replacing the damaged or destroyed structural components qualify for the special Liberty Zone depreciation allowance.
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Tests to be met.


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To qualify for the special Liberty Zone depreciation allowance, your property must meet all of the following tests.
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Acquisition date test.
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You must have acquired the property by purchase after September 10, 2001, and there must not have been a binding written contract for the acquisition in effect before September 11, 2001.
Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001.
taxmap/pubs/p954-004.htm#TXMP33ab508e

Placed in service date test.
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Generally, the property must be placed in service for use in your trade or business or for the production of income before 2007 (2010 in the case of qualifying nonresidential real property and residential rental property).
If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback.
taxmap/pubs/p954-004.htm#TXMP639880f1

Substantial use test.
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Substantially all (80% or more) use of the property must be in the Liberty Zone and in the active conduct of your trade or business in the Liberty Zone.
taxmap/pubs/p954-004.htm#TXMP1ae0fbc8

Original use test.
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The original use of the property in the Liberty Zone must have begun with you after September 10, 2001.
Used property can be qualified Liberty Zone property if it has not previously been used within the Liberty Zone. Also, additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test if the original use of the property in the Liberty Zone began with you.
taxmap/pubs/p954-004.htm#TXMP11d3e005

Excepted property.


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The following property does not qualify for the special Liberty Zone depreciation allowance.
taxmap/pubs/p954-004.htm#TXMP3aa0ea31

Election not to claim the Liberty Zone allowance.


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You can elect not to claim the special Liberty Zone depreciation allowance for qualified property. If you make this election for any property, it applies to all property in the same property class placed in service during the year. To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election.
taxmap/pubs/p954-004.htm#TXMP5f2b4188

More information.


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For more information, get Publication 946.
taxmap/pubs/p954-004.htm#TXMP4704ccdd

Increased Section 179 Deduction


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previous topic occurrence Increased Section 179 Deduction next topic occurrence

Section 179 of the Internal Revenue Code allows you to choose to deduct all or part of the cost of certain qualifying property in the year you place it in service. You can do this instead of recovering the cost by taking depreciation deductions over a specified recovery period. There are limits, however, on the amount you can deduct in a tax year.
You may be able to claim an increased section 179 deduction if the property you place in service is qualified Liberty Zone property. The increase can be as much as $35,000.
taxmap/pubs/p954-004.htm#TXMP47db5a68

Qualified Liberty Zone property.


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To qualify for the increased section 179 deduction, your property must be qualified Liberty Zone property (described earlier under Special Liberty Zone Depreciation Allowance) that qualifies for the section 179 deduction. For information on the requirements that must be met for property to qualify for the section 179 deduction, see Publication 946.
taxmap/pubs/p954-004.htm#TXMP00581674

Section 179 deduction limits.


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There are limits on the amount you can deduct under section 179. The following sections explain how these limits are increased for qualified Liberty Zone property.
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Maximum dollar limit.
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The total cost of section 179 property that you can deduct for a tax year generally cannot be more than the maximum section 179 dollar limit. However, if you place section 179 property that is qualified Liberty Zone property in service during the year, this maximum dollar limit is increased by the smaller of the following amounts.
  1. The cost of that property.
  2. $35,000.
The following table shows these maximum dollar limits.
Table 3. Maximum Dollar Limits
  Maximum
 MaximumDollar Limit
For Tax YearsSection 179With Qualified
Beginning In:Dollar LimitZone Property
2002$ 24,000$ 59,000
2003100,000135,000
2004102,000 *137,000 *
2005 Inflation
Adjusted
Inflation
Adjusted
*Inflation-adjusted amount for 2004
Deposit
For 2005, the total amount you can elect to deduct under section 179 will be increased to reflect an adjustment for inflation. The inflation-adjusted amount for 2004 is $102,000 (rounded to the nearest multiple of $1,000).
These maximum dollar limits are reduced if you go over the investment limit (discussed next) in any tax year.
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Investment limit.


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For each dollar of your business cost over the threshold amount ($400,000 for 2003) for section 179 property placed in service in a tax year, reduce the maximum dollar limit by $1 (but not below zero). However, count only one-half of the cost of section 179 property that is also qualified Liberty Zone property when figuring the investment limit.
taxmap/pubs/p954-004.htm#TXMP459b1649

Reduced dollar limit for cost exceeding the threshold amount.
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If the cost of your qualifying section 179 property placed in service in 2003 is over $400,000, you must reduce the dollar limit (but not below zero) by the amount of cost over $400,000. If the cost of your section 179 property placed in service during 2003 is $500,000 or more, you cannot take a section 179 deduction and you cannot carry over the cost that is more than $500,000.
Deposit
For 2005, the threshold amount used to figure any reduction in the dollar limit will be increased to reflect an adjustment for inflation. The inflation-adjusted amount for 2004 is $410,000 (rounded to the nearest multiple of $10,000).
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Recapture.


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The recapture rules of section 179 apply when qualified Liberty Zone property is no longer used in the Liberty Zone.
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More information.


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For more information about the section 179 deduction and the increased section 179 deduction (including the section 179 deduction for off-the-shelf computer software that is placed in service in 2003), see chapter 2 of Publication 946.
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New York Liberty Zone Leasehold Improvement Property


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New York Liberty Zone Leasehold Improvement Property

Qualified New York Liberty Zone leasehold improvement property is classified as 5-year property. This means that it is depreciated over a recovery period of 5 years. The straight-line method must be used.
Under ADS, the recovery period is 9 years.
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Qualified New York Liberty Zone leasehold improvement property.


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This is any qualified leasehold improvement property (as defined later) if all of the following requirements are met.
taxmap/pubs/p954-004.htm#TXMP26cd7a38

Qualified leasehold improvement property.


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Generally, this is any improvement to an interior part of a building that is nonresidential real property, provided all of the following requirements are met.
However, a qualified leasehold improvement does not include any improvement for which the expenditure is due to any of the following.
Generally, a binding commitment to enter into a lease is treated as a lease and the parties to the commitment are treated as the lessor and lessee. However, a lease or a binding commitment between related persons is not treated as a lease.
taxmap/pubs/p954-004.htm#TXMP5a81f69e

Related persons.
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For this purpose, the following are related persons.
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More information.


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For more information, see Publication 946.
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Extension of Replacement Period  
for Involuntarily Converted Property


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Extension of Replacement Period for Involuntarily Converted Property

The replacement period has been extended from 2 years to 5 years for certain property involuntarily converted in the Liberty Zone as a result of the terrorist attack on September 11, 2001, but only if substantially all the use of the replacement property is in New York City.
If you buy replacement property within the replacement period, you may be able to postpone any gain you have had on the involuntary conversion.
taxmap/pubs/p954-004.htm#TXMP38a25045

Replacement period.


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The replacement period ends 5 years after the close of the first year in which any part of your gain is realized.
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More information.


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For more information about involuntary conversions, see Postponement of Gain in Publication 547, Casualties, Disasters, and Thefts.
previous pagePrevious Page: Publication 954 - Tax Incentives for Empowerment Zones and Other Distressed Communities - Enterprise Communities
next pageNext Page: Publication 954 - Tax Incentives for Empowerment Zones and Other Distressed Communities - New Markets Credit
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication