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.taxmap/pubs/p954-004.htm#TXMP308fa0a2
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.taxmap/pubs/p954-004.htm#TXMP264cad3b
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.
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
A Liberty Zone business employee is generally any employee who performs 80% or more of his or her services:
- In the Liberty Zone (defined earlier), or
- 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.
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:
- The number of employees of the business on September 11, 2001, in the Liberty Zone, over
- The number of Liberty Zone business employees (determined without regard to employees described in (2) above) of the business on the day to which the limit is being applied.
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.taxmap/pubs/p954-004.htm#TXMP77c58536
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
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:
- Does not work for you at least for 120 hours, or
- Is your relative or dependent.
Use Form 8884 to claim this credit.taxmap/pubs/p954-004.htm#TXMP1e930dc7
Wages you use to figure this credit cannot be used to figure the work opportunity credit or welfare-to-work credit.taxmap/pubs/p954-004.htm#TXMP0bd0881b
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).taxmap/pubs/p954-004.htm#TXMP5b8621f0
For more information about this credit, see Form 8884.taxmap/pubs/p954-004.htm#TXMP18b5276e
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.taxmap/pubs/p954-004.htm#TXMP0152d34d
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.taxmap/pubs/p954-004.htm#TXMP4f325624
Property qualifies for the special Liberty Zone depreciation allowance if it meets all the following requirements.
- It is one of the following types of property.
- Property depreciated under MACRS with a recovery period of 20 years or less.
- Water utility property.
- 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.)
- Certain nonresidential real property and residential rental property (defined later).
- It meets all the following tests (explained later under Tests to be met).
- Acquisition date test.
- Placed in service date test.
- Substantial use test.
- Original use test.
- 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.
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.taxmap/pubs/p954-004.htm#TXMP794da57c
To qualify for the special Liberty Zone depreciation allowance, your property must meet all of the following tests.taxmap/pubs/p954-004.htm#TXMP5675f114
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
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
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
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
The following property does not qualify for the special Liberty Zone depreciation allowance.
- Property eligible for the special depreciation allowance explained earlier under Special depreciation allowance.
- Property required to be depreciated using the Alternative Depreciation System (ADS). This includes listed property used 50% or less in a qualified business use.
- Qualified New York Liberty Zone leasehold improvement property (defined later under New York Liberty Zone Leasehold Improvement Property).
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
For more information, get Publication 946.taxmap/pubs/p954-004.htm#TXMP5a6fc3dd
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 $35,000.taxmap/pubs/p954-004.htm#TXMP47db5a68
To qualify for the increased section 179 deduction, your property must be qualified Liberty Zone property (described earlier under Special Liberty Zone Depreciation Allowance) that qualifies for the section 179 deduction. For information on the requirements that must be met for property to qualify for the section 179 deduction, see Publication 946.taxmap/pubs/p954-004.htm#TXMP00581674
There are limits on the amount you can deduct under section 179. The following sections explain how these limits are increased for qualified Liberty Zone property.taxmap/pubs/p954-004.htm#TXMP43c5bf0b
The total cost of section 179 property that you can deduct for a tax year generally cannot be more than the maximum section 179 dollar limit. However, if you place section 179 property that is qualified Liberty Zone property in service during the year, this maximum dollar limit is increased by the smaller of the following amounts.
- The cost of that property.
The following table shows these maximum dollar limits.
Table 3. Maximum Dollar Limits
| || || Maximum |
| || Maximum || Dollar Limit |
| For Tax Years || Section 179 || With Qualified |
| Beginning In: || Dollar Limit || Zone Property |
|2002||$ 24,000||$ 59,000|
|2004||102,000 * ||137,000 * |
|2005|| Inflation |
| Inflation |
|*Inflation-adjusted amount for 2004|
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.taxmap/pubs/p954-004.htm#TXMP23bbe53a
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
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.
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).
The recapture rules of section 179 apply when qualified Liberty Zone property is no longer used in the Liberty Zone.taxmap/pubs/p954-004.htm#TXMP1da1cb62
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.taxmap/pubs/p954-004.htm#TXMP57f2189d
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.taxmap/pubs/p954-004.htm#TXMP338046d2
This is any qualified leasehold improvement property (as defined later) if all of the following requirements are met.
- The improvement is to a building located in the New York Liberty Zone (defined earlier).
- The improvement is placed in service after September 10, 2001, and before January 1, 2007.
- No written binding contract for the improvement was in effect before September 11, 2001.
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.
- The improvement is made under or pursuant to a lease by the lessee (or any sublessee) or the lessor of that part of the building.
- That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part.
- The improvement is placed in service more than 3 years after the date the building was first placed in service.
However, a qualified leasehold improvement does not include any improvement for which the expenditure is due to any of the following.
- The enlargement of the building.
- Any elevator or escalator.
- Any structural component benefiting a common area.
- The internal structural framework of the building.
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
For this purpose, the following are related persons.
- Members of an affiliated group.
- The persons listed in items (1) through (9) under Related persons in chapter 1 of Publication 946 (except that "80% or more" should be substituted for "more than 10%" each place it appears).
- An executor and a beneficiary of the same estate.
For more information, see Publication 946.taxmap/pubs/p954-004.htm#TXMP0b4afa3f
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
The replacement period ends 5 years after the close of the first year in which any part of your gain is realized.taxmap/pubs/p954-004.htm#TXMP5f233efd
For more information about involuntary conversions, see Postponement of Gain in Publication 547, Casualties, Disasters, and Thefts.