GO Zone bonus depreciation extended.

• Author: Hecimovich, Gary

On Dec. 20, 2006, President Bush signed into law the Tax Relief and Health Care Act of 2006 (TRAHCA '06).This much-anticipated legislation extended a slate of 23 tax provisions that expired at the end of 2005 or were set to expire in the near future, including the research and experimentation tax credit, the welfare-to-work credit and the new markets tax credit. (The research credit is discussed in Arkin and Goldbas, Tax Clinic, "Enhanced Research Credit for 2007," p. 134, this issue.) Included is a provision extending the placed-in-service date for taxpayers chiming 50% additional first-year bonus depreciation for certain qualified Gulf Opportunity Zone (GO Zone) property. However, the extension applies only to "specified Gulf Opportunity Zone extension property" a subset of otherwise-qualifying GO Zone property.

The "Gulf Opportunity Zone" is defined as that portion of the Hurricane Katrina Disaster Area determined to warrant individual and/or public assistance from the Federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. "Hurricane Katrina disaster area" means an area with respect to which a major disaster was declared by the President before Sept. 14, 2005, under Section 401 of that Act.

GO Zone Act Revisited

Almost exactly one year before the enactment of the TRAHCA '06, President Bush signed into law the Gulf Opportunity Zone Act of 2005 (GO Zone Act). It provided tax relief to businesses to encourage redevelopment and capital expansion within the Gulf region affected by Hurricanes Rita, Wilma and Katrina. One of the most popular and widely applicable incentives was a provision for additional first-year depreciation of 50% of the adjusted basis of qualified GO Zone property. To qualify for bonus depreciation, property must meet each of the following six criteria:

1. It must be one of the following types of depreciable property:

   * Modified accelerated cost recovery system (MACRS) property with a 20-year-or-less recovery period;

   * Computer software (as defined in Sec. 167(f)(1)(B)) depreciable under Sec. 167(a);

   * Water utility property;

   * Qualified leasehold improvement property;

   * Nonresidential real property;

   * Residential rental property.

2. Substantially all of the property's use (80% or more during each tax year) must be in the GO Zone.

3. The property must be used in the active conduct of a trade or business by the taxpayer in the GO Zone; property held merely for the production of income or used in an activity not engaged in for profit does not qualify.

4. Original use must start with the taxpayer in the GO Zone on or after Aug. 27, 2005. Rules similar to the original-use rules in Kegs. Sec. 1.168(k)-1(b)(3) apply. Used property will meet the original-use requirement if...