Vitter Announces Passage of Hurricane Katrina Tax Bill

Includes Tax Benefits for Hurricane Katrina

(Washington, D.C.)U.S. Senator David Vitter today announced that the U.S. Senate passed the Gulf Opportunity Zone Act, which includes nearly $8 billion in tax relief for areas affected by the hurricanes.

            “I’m very excited that my colleagues in the Senate understand how pivotal it was to pass this tax bill prior to Christmas,” Vitter said. “Bringing tax relief to the Hurricane Katrina area will help businesses rebuild, which is crucial to economic recovery.”

            The bill creates additional tax-exempt bond authority to help rebuild the devastated infrastructure in the Gulf Opportunity Zone (GO Zone). These bonds will create more financing options for public and private facilities that are crucial to getting jobs back to the area. GO Zone bonds can be issued by the state of Louisiana and local municipalities to pay for acquisition, construction and renovation of nonresidential real property, qualified low-income residential rental housing, single-family residential housing and public utility property located in the GO Zone. GO Zone bonds can be issued until December 31, 2010.

            In addition to creating new bonds, this tax bill provides Louisiana and local municipalities the opportunity to refinance debt before January 1, 2011, for certain government bonds, including 501(c)(3) bonds. The bond issuer can restructure eligible debt by refinancing at a lower rate or by spreading interest payments over a longer period of time.

            “Creating additional financing options will help the devastated areas rebuild public and private facilities. These facilities play a key role in bringing jobs back to southeast Louisiana,” Vitter said.

            The tax bill also provides a 50 percent bonus depreciation of the cost of new property investments to help businesses rebuild in the GO Zone. This additional deduction applies to purchased computer software, leasehold improvements, certain commercial and residential real estate expenditures and equipment. All depreciation deductions, including bonus depreciation, would be exempt from the alternative minimum tax. This provision applies to property placed in service through December 31, 2007, or December 31, 2008 for real property.

            Current law permits certain small businesses to deduct up to $100,000 of the cost of property used in the business. The GO Zone Act allows this amount to be doubled to $200,000 for qualifying expenditures made in the disaster area through 2007. Additionally, the level of investment at which benefits phase out will increase from $400,000 to $1 million of qualifying purchases, allowing more opportunities to use this tax benefit in rebuilding. These deductions will remain available for property placed in service in the GO Zone after August 27, 2005, through 2007.

            Other provisions of the GO Zone Act include:

  • Louisiana can receive allocations of low-income housing tax credits of $1 billion over ten years as measured by the 2004 population date for years 2006 to 2008 instead of by current population.
  • Fifty percent of the costs related to site cleanup and demolition would be deductible by businesses, effective for amounts paid or incurred after August 27, 2005, through 2007.
  • The proposal extends the deductibility of costs of cleaning up Brownfields in the Katrina GO Zone for two years and allows for expensing for the cleanup of petroleum products in the Zone paid or incurred after August 27, 2005, through 2007.
  • Employers located in the Katrina and Rita GO Zone that continue to pay their employees while the business in operable will receive a 40 percent tax credit for wages paid up to $6,000 if paid after August 28, 2005, and before December 31, 2005.
  • The rehabilitation credit from GO Zone projects will be raised from 1 percent to 13 percent of qualified expenditures for any qualified rehabilitated building other than a certified historic structure, and from 20 percent to 26 percent for any certified historic structure.
  • For taxpayers owning less than 500 acres of timber, this bill raises the limit of reforestation cost to $20,000 and allows a five-year carryback, rather than the current 2-year carryback and $10,000 limit. The increase for the reforestation expensing limit is available for expenditures incurred prior to January 1, 2008.
  • Taxpayers with casualty losses associated with public utility property caused by Hurricane Katrina can elect to either carryback a net operating loss attributable to certain casualty losses 10 years, or treat certain casualty losses has having occurred five years prior to the disaster under the proposal.
  • Public utilities will be able to carryback disaster losses for five years.
  • The net operating loss carryback period will be extended from two years to five years for net operating losses attributable for new investment and repairing existing investment in the areas damaged by Hurricane Katrina, business casualty losses caused by Hurricane Katrina and moving expenses and temporary housing expenses for employees working in areas damaged by Hurricane Katrina.
  • The bill authorizes GO Zone states to issue debt service tax credit bonds providing credits against federal income tax instead of interest payments, so that the states can provide local communities unable to meet their debt service requirement as a result of the hurricanes. These bonds would be required to mature before January 1, 2008.
  • New Markets Tax Credits (NMTC) allow businesses investing in low-income communities lacking access to capital to take a 39 percent tax credit over seven years for investments in qualified community development entities. The bill also allows an additional $300 million for 2006 and $400 million in 2007 for NMTC authority for community development entities in the GO Zone.
  • The bill doubles the Hope Credit dollar amounts, increasing the maximum to $3,000, and doubles the Lifetime Learning Credit percentage from 20 percent to 40 percent. The Lifetime Learning Credit maximum will be $4,000 for students attending undergraduate or graduate institutions in the GO Zone.
  • Employees are allowed to exclude up to $600 per month from gross income for lodging provided by his or her employer located in the Katrina GO Zone. The employer gets a tax credit equal to 30 percent benefit provided.

            The U.S. House of Representatives passed the bill and it will now be sent to the president for his signature.

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