Additional Tax Relief for Businesses

You can take a special depreciation allowance for qualified Gulf Opportunity (GO) Zone property (as defined below) you place in service after August 27, 2005. The allowance is an additional deduction of 50% of the property's depreciable basis (after any section 179 deduction and before figuring your regular depreciation deduction). The special allowance applies only for the first year the property is placed in service.

The allowance is deductible for both the regular tax and the alternative minimum tax (AMT). There is no AMT adjustment required for any depreciation figured on the remaining basis of the property.

You can elect not to deduct the special GO Zone depreciation allowance for qualified property. If you make this election for any property, it applies to all property in the same class placed in service during the year.

Property that qualifies for the special GO Zone depreciation allowance includes the following.

• Tangible property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less.
• Water utility property.
• Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS.)
• Qualified leasehold improvement property.
• Nonresidential real property and residential rental property.

For more information on this property, see Publication 946.

To be qualified GO Zone property, the property must also meet all of the following tests.

• You must have acquired the property, by purchase, after August 27, 2005, but only if no binding written contract for the acquisition was in effect before August 28, 2005.
• The property must be placed in service before 2008 (2009 in the case of nonresidential real property and residential rental property).
• Substantially all of the use of the property must be in the GO Zone and in the active conduct of your trade or business in the GO Zone.
• The original use of the property in the GO Zone must begin with you after August 27, 2005. Used property can be qualified GO Zone property if it has not previously been used within the GO Zone. Also, additional capital expenditures you incurred after August 27, 2005, to recondition or rebuild your property meet the original use test if the original use of the property in the GO Zone began with you.

Qualified GO Zone property does not include any of the following.

• Property required to be depreciated using the Alternative Depreciation System (ADS).
• Property any portion of which is financed with the proceeds of a tax-exempt obligation under section 103.
• Property for which you are claiming a commercial revitalization deduction.
• Any property used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store, the principal business of which is the sale of alcoholic beverages for consumption off premises.
• Any gambling or animal racing property (as defined below).
• Property in the same class as that for which you elected not to claim the special GO Zone depreciation allowance.

Gambling or animal racing property is:

• Any equipment, furniture, software, or other property used directly in connection with gambling, the racing of animals, or the on-site viewing of such racing, and
• The portion of any real property (determined by square footage) that is dedicated to gambling, the racing of animals, or the on-site viewing of such racing, unless this portion is less than 100 square feet.

If, in any year after the year you claim the special allowance, the property ceases to be qualified GO Zone property, you may have to recapture as ordinary income any excess benefit you received from claiming the special allowance.

An increased section 179 deduction is allowable for qualified section 179 Gulf Opportunity (GO) Zone property (as defined later) placed in service in the GO Zone.

The limit on the section 179 deduction ($105,000 for 2005, $108,000 for 2006) is increased by the smaller of:

• $100,000, or
• The cost of qualified section 179 GO Zone property placed in service during the year (including such property placed in service by your spouse, even if you are filing a separate return).

The amount for which you can make the election is reduced if the cost of all section 179 property you placed in service during the year exceeds $420,000 for 2005 ($430,000 for 2006) increased by the smaller of:

• $600,000, or
• The cost of qualified section 179 GO Zone property placed in service during the year.

Qualified section 179 GO Zone property is section 179 property that is qualified GO Zone property (explained earlier under Special Depreciation Allowance). Section 179 property does not include nonresidential real property or residential rental property. For more information, including the requirements that must be met for property to qualify for the section 179 deduction, see chapter 2 of Publication 946.

For the work opportunity credit, the definition of "targeted group employee" has been expanded to include a Hurricane Katrina employee.

A Hurricane Katrina employee is:

• A person who, on August 28, 2005, had a main home in the core disaster area and, within a two-year period beginning on that date, is hired to perform services principally in the core disaster area; or
• A person who, on August 28, 2005, had a main home in the core disaster area, was displaced from that main home as a result of Hurricane Katrina, and was hired during the period beginning on August 28, 2005, and ending on December 31, 2005.

Generally, qualified wages do not include wages you paid to a targeted group employee who worked for you previously. However, wages will qualify if:

• You paid them to an employee who is a Hurricane Katrina employee,
• The employee was not in your employment on August 28, 2005, and
• This is your first hire of the employee as a Hurricane Katrina employee after August 28, 2005.

For more information, see Form 5884.

An employee must provide to the employer reasonable evidence that he or she is a Hurricane Katrina employee. An employer may accept a completed Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity and Welfare-to-Work Credits, as such evidence. The certification requirements described in Form 8850 do not apply to a Hurricane Katrina employee. Do not send any Forms 8850 that have only box 1 checked to the state employment security agency. Instead, the employer should keep these Forms 8850 with the employer's other records. For more information, see Form 8850 and its instructions.

An eligible employer who conducted an active trade or business in the Gulf Opportunity (GO) Zone, the Rita GO Zone, or the Wilma GO Zone can claim the employee retention credit. The credit is 40% of qualified wages for each eligible employee (up to a maximum of $6,000 in qualified wages per employee). Generally, you must reduce your deduction for salaries and wages by the amount of this credit (before the tax liability limit). Use Form 5884-A to claim the credit. See the following rules and definitions for each hurricane.

The following definitions apply to employers affected by Hurricane Katrina.

For this purpose, an eligible employer is any employer who conducted an active trade or business on August 28, 2005, in the GO Zone and whose trade or business was inoperable on any day after August 28, 2005, and before January 1, 2006, because of damage caused by Hurricane Katrina.

For this purpose, an eligible employee is an employee whose principal place of employment on August 28, 2005, with such eligible employer was in the GO Zone. An employee is not an eligible employee for purposes of Hurricane Katrina if the employee is treated as an eligible employee for the work opportunity credit.

The following definitions apply to employers affected by Hurricane Rita.

For this purpose, an eligible employer is any employer who conducted an active trade or business on September 23, 2005, in the Rita GO Zone and whose trade or business was inoperable on any day after September 23, 2005, and before January 1, 2006, because of damage caused by Hurricane Rita.

For this purpose, an eligible employee is an employee whose principal place of employment on September 23, 2005, with such eligible employer was in the Rita GO Zone. An employee is not an eligible employee for purposes of Hurricane Rita if the employee is treated as an eligible employee for the work opportunity credit or the Hurricane Katrina employee retention credit.

The following definitions apply to employers affected by Hurricane Wilma.

For this purpose, an eligible employer is any employer who conducted an active trade or business on October 23, 2005, in the Wilma GO Zone and whose trade or business was inoperable on any day after October 23, 2005, and before January 1, 2006, because of damage caused by Hurricane Wilma.

For this purpose, an eligible employee is an employee whose principal place of employment on October 23, 2005, with such eligible employer was in the Wilma GO Zone. An employee is not an eligible employee for purposes of Hurricane Wilma if the employee is treated as an eligible employee for the work opportunity credit or the Hurricane Katrina or Rita employee retention credit.

Qualified wages are wages you paid or incurred before January 1, 2006, (up to $6,000 per employee) for an eligible employee beginning on the date your trade or business first became inoperable at the employee's principal place of employment immediately before the applicable hurricane, and ending on the date your trade or business resumed significant operations at that place. In addition, the wages must have been paid or incurred after the following date.

• August 28, 2005, for Hurricane Katrina.
• September 23, 2005, for Hurricane Rita.
• October 23, 2005, for Hurricane Wilma.

This includes wages paid even if the employee performed no services, performed services at a place of employment other than the principal place of employment, or performed services at the principal place of employment before significant operations resumed.

Wages qualifying for the credit generally have the same meaning as wages subject to the Federal Unemployment Tax Act (FUTA). Qualified wages also include amounts you paid for medical or hospitalization expenses in connection with sickness or accident disability. Qualified wages for any employee must be reduced by the amount of any work supplementation payment you received under the Social Security Act.

For agricultural employees, if the work performed by any employee during more than half of any pay period qualified under FUTA as agricultural labor, that employee's wages subject to social security and Medicare taxes are qualified wages. For a special rule that applies to railroad employees, see section 51(h)(1)(B).

Qualified wages do not include the following.

• Wages paid to your dependent or a related individual. See section 51(i)(1).
• Wages paid to any employee during the period for which you received payment for the employee from a federally funded on-the-job training program.
• Wages for services of replacement workers during a strike or lockout.

For more information, see Form 5884-A.

An employer who conducted an active trade or business in the Gulf Opportunity (GO) Zone can claim the Hurricane Katrina housing credit. The credit is equal to 30% of the value (up to $600 per month per employee) of in-kind lodging furnished to a qualified employee (and the employee's spouse or dependents) from January 1, 2006, through July 1, 2006. The value of the lodging is excluded from the income of the qualified employee but is treated as wages for purposes of taxes imposed under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). Generally, you must reduce your deduction for salaries and wages by the amount of this credit (before the tax liability limit). The employer must use Form 5884-A to claim the credit.

A qualified employee is an individual who had a main home in the GO Zone on August 28, 2005, and who performs substantially all employment services in the GO Zone for the employer furnishing the lodging. The employee cannot be your dependent or a related individual. See section 51(i)(1).

For more information, see Form 5884-A.

You may be able to elect to deduct a limited amount of reforestation costs for each qualified timber property. The deduction for any tax year generally is limited to $10,000 ($5,000 if married filing separately, $0 for a trust). However, this limit is increased if you paid or incurred reforestation costs after the applicable date below and any portion of the qualified timber property is located in one of the following areas.

1. August 27, 2005, if any portion of the property is located in the GO Zone.
2. September 22, 2005, if any portion of the property is located in the Rita GO Zone (but not in the GO Zone).
3. October 22, 2005, if any portion of the property is located in the Wilma GO Zone.

The limit for each qualified timber property is increased by the smaller of:

• $10,000 ($5,000 if married filing separately, $0 for a trust), or
• The amount of reforestation costs you paid or incurred after the applicable date for the qualified timber property, any portion of which is located in the zone described above.

The increase in the limit applies only to costs paid or incurred before 2008.

However, these rules do not apply to any timber producer who:

• Held more than 500 acres of qualified timber property at any time during the tax year,
• Is a corporation with stock publicly traded on an established securities market, or
• Is a real estate investment trust.

For more information about the election to deduct reforestation costs, see chapter 8 in Publication 535, Business Expenses.

You can elect to deduct 50% of any qualified GO Zone clean-up costs for the tax year in which the costs are paid or incurred, instead of capitalizing them. Qualified GO Zone clean-up costs are any amounts paid or incurred after August 27, 2005, and before January 1, 2008, for the removal of debris from, or the demolition of structures on, real property located in the GO Zone that is:

• Held by you for use in a trade or business or for the production of income, or
• Inventory or other property held primarily for sale to customers in the ordinary course of your trade or business.

The rehabilitation credit is increased for qualified rehabilitation expenditures paid or incurred after August 27, 2005, and before January 1, 2009, on buildings located in the GO Zone as follows.

• For pre-1936 buildings (other than certified historic structures), the credit percentage is increased from 10% to 13%.
• For certified historic structures, the credit percentage is increased from 20% to 26%.

For more information, see Form 3468, Investment Credit.