Congress, in the waning days of its 2005 session, after failing to carry out significant parts of its tax agenda for the year, has managed to pass a Gulf Coast recovery tax act. As is common with the "last stagecoach out of town" for the year, a lot of things managed to "jump on."The hurricane provisions take up 84 pages of bill text, but the legislation goes on for another 100 pages. Among the areas addressed beyond hurricane recovery and relief are a few extensions of expiring provisions, a couple of miscellaneous items, and a huge package of technical corrections covering 10 pieces of tax legislation going back as far as 1987.
The most significant part of that group are the substantive technical corrections related to the American Jobs Creation Act of 2004, of which there are 39 provisions, touching on almost every significant provision of that act, as well as some that were not all that significant, at least to most taxpayers. This legislation is likely to be studied around the country as much for the technical correction provisions as for the hurricane relief and recovery provisions.
The hurricane recovery provisions
The new legislation establishes three Gulf Opportunity Zones and defines three hurricane disaster areas associated with each of the three principal hurricanes this season: Katrina, Rita and Wilma.
Many of the new tax provisions focused on recovery, however, are limited to the Gulf Opportunity Zone, which is the zone associated with the portion of the Hurricane Katrina disaster area for which the presidential disaster declarations authorized both individual as well as public assistance. Many of these provisions are similar to ones that we have seen in the past in response to 9/11 or to stimulate the economy during a recession.
New provisions focused on the Gulf Opportunity Zone include: additional tax-exempt bond financing, as well as advance refunding of certain tax-exempt bonds; 50 percent first-year expensing; expanded Code Sec. 179 expensing; and a 50 percent expensing election for certain demolition and clean-up costs.
Also focused on the Gulf Opportunity Zone are the extension of the expensing of environmental remediation costs; an increase in the rehabilitation credit; special treatment of public utility casualty losses; five-year carryback of net operating losses; a credit for holders of Gulf Tax Credit Bonds issued by the states of Alabama, Louisiana or Mississippi; expansion of the new markets tax credit; and relaxation of the income eligibility requirements for qualified residential rental projects. A new exclusion is also available to employees for employer-provided housing, with a related credit available to the employer.
Beyond the more generally focused rebuilding provisions are a few more targeted provisions. Also limited to the GO Zone is a doubling of the Hope and Lifetime Learning credits to assist colleges and students in the Katrina area. A more generous carryback of public utility property disaster losses is also included.
New recovery provisions that apply to not only the Gulf Opportunity Zone but also to the Rita GO Zone and the Wilma GO Zone include an enhanced low-income housing credit and special provisions for small timber producers. The timber provisions include increased expensing and a five-year net operating loss carryback. Also in this category is a provision authorizing the Secretary of the Treasury to extend the placed-in-service date for bonus depreciation for property placed in service in any of the GO zones.
In a controversial move, the legislation expressly excludes some activities from receiving certain tax breaks, including casinos, animal racetracks, liquor stores, golf courses and country clubs, massage parlors, and hot tub and sun tan facilities. The final language excluded the benefits only for these particular activities, not for related facilities such as restaurants, hotels and parking lots.
Extension of Katrina relief
The Katrina Emergency Tax Relief Act of 2005 passed Congress relatively quickly after Katrina and before Rita and Wilma struck. This legislation extends many of the benefits provided to Katrina victims to the victims of Rita and Wilma. These include tax-favored withdrawals from retirement plans, recontribution of plan withdrawals associated with uncompleted home purchases, increased limits on plan loans, and the suspension of the limitations on personal casualty losses. The special rules for mortgage revenue bonds have also been expanded to apply to all three hurricanes.
The legislation not only extends many of the Katrina benefits to Rita and Wilma victims, but also codifies into the tax law the Katrina tax benefits. Employee retention credits are provided for each of the three hurricanes. The waiver of the limits on corporate charitable contributions is expanded to apply to contributions with respect to all three hurricanes, although the provisions expired on Dec. 31, 2005.
The waiver of the individual contribution limits had not been limited to Hurricane Katrina contributions, and therefore did not need to be expanded. It also, however, expired on Dec. 31, 2005.
The bulk of the new tax legislation is taken up by technical correction provisions, the majority of which are substantive rather than merely clerical in nature. Among the 39 substantive corrections to the American Jobs Creation Act of 2004 are those related to the Code Section 199 domestic manufacturing deduction, nonqualified deferred compensation, dividend repatriation, the sales tax deduction, tax shelter reporting and disclosure, and expatriation.
There are over two dozen substantive corrections generally affecting business and about a dozen affecting individual taxpayers. There are five technical corrections impacting S corporations, seven directly related to C corporations, and six impacting partnerships.
Among areas with a significant focus in the technical corrections are real estate, including real estate investment trusts, tax-exempt entities and the international tax area.
Substantive corrections are also included addressing electricity production and transmission, estates and trusts, aircraft, railroads, nuclear power, engineering and architectural services, construction, energy, government contractors, film and television production, farmers and fishermen, naval shipbuilding, and cooperatives.
There are also several technical corrections related to Internal Revenue Service administrative matters. The technical corrections to the Working Families Tax Relief Act of 2004 generally relate to clarifications with respect to the uniform definition of a child.
Also thrown into this legislation are a few extenders and other miscellaneous provisions. Extended for one year is the election to include combat pay of military personnel as earned income for purposes of the earned income credit. Also extended for one year are provisions relating to the authority for certain undercover operations and disclosures of tax return information.
The new law also addresses several aspects of interest suspension and tax shelters in an effort to encourage shelter participants to come forward while permitting the provisions to work well with IRS settlement efforts.
Most of the provisions in this legislation have a potential impact on 2005 returns. Many of the hurricane-related provisions relate back to commencement dates associated with each of the three hurricanes. The technical corrections relate back to the enactment dates of the particular piece of tax legislation being amended. Other provisions are effective as of the enactment date, Dec. 31, 2005.
Tax practitioners will want to make sure that they are cognizant of the details in these provisions in the preparation of 2005 returns, and that any tax return preparation software has been updated to reflect these changes.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH, a WoltersKluwer company.
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