PORTFOLIO

Tax Incentives for Economically Distressed Areas (Portfolio 597)

Tax Management Portfolio, Tax Incentives for Economically Distressed Areas, No. 597-2nd, brings together in one place analyses of the many income tax provisions designed to encourage business activity and investment in economically distressed areas. The portfolio separates the analyses into four categories. The portfolio also presents a history of the provisions as they have been added, expanded, and modified.

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DESCRIPTION

Tax Management Portfolio, Tax Incentives for Economically Distressed Areas, No. 597-2nd, brings together in one place analyses of the many income tax provisions designed to encourage business activity and investment in economically distressed areas. The portfolio separates the analyses into four categories. The portfolio also presents a history of the provisions as they have been added, expanded, and modified.
First, the portfolio discusses the different types of qualified distressed areas. This permits the practitioner to compare and contrast the regions Congress has selected for tax-targeted assistance.
Second, the portfolio discusses the various types of qualified assets. This permits the practitioner not only to compare and contrast the different kinds of properties that Congress intends to encourage but also to explore the complex relationships between asset types and the different qualified distressed areas.
Third, the portfolio analyzes the specific tax benefits available to taxpayers who comply with the requirements for conducting business or making investments in economically distressed areas. These benefits include gross income exclusions, nonrecognition, deductions, and credits. The benefits are established not only in provisions specially designed for the particular tax-favored activity or investment but also in expansions and modifications of definitions and requirements in place for tax benefits available to taxpayers generally.
Fourth, the portfolio describes the many tax detriments that affect taxpayers who take advantage of one or more of the tax incentives for economically distressed areas. These detriments consist of basis reductions, deduction reductions, tax attribute reductions, and income recaptures.


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AUTHORS

JAMES EDWARD MAULE
James Edward Maule, B.S., University of Pennsylvania (1973); J.D., Villanova University (1976); LL.M. (Taxation), George Washington University (1979); lecturer, Villanova University Graduate Tax Program and Tax Forum CLE Programs; lecturer, Philadelphia Bar Association Tax Section; member, U.S. Income Advisory Board, Tax Management Inc.; former attorney-advisor, United States Tax Court, Judge Herbert L. Chabot; former attorney-advisor, Chief Counsel to the Internal Revenue Service; former Editorial Advisory Board member and Columnist, Journal of Limited Liability Companies; former lecturer, ALI-ABA; former lecturer, Tax Management, Inc. & Continuing Legal Education Satellite Network; former lecturer, Pennsylvania Bar Institute; former lecturer, Georgetown University Law Center Institute on State and Local Taxation; former lecturer, The Dickinson School of Law CLE Programs; member, American Bar Association, Section of Taxation, Committee on S Corporations (Consultant and former Chair, Subcommittee on Subchapter S and State Law; former Chair, Subcommittee on Comparison of Partnerships and S Corporations); member, American Bar Association, Section of Taxation, Committee on Teaching Taxation (Chair, Subcommittee on Manuscripts and Unpublished Teaching Materials; member, Subcommittee on Important Developments); member, American Bar Association, Section of Taxation, Tax Practice Management Committee; member, American Bar Association, Section of Taxation, Formation of Tax Policy Committee; member, American Bar Association, Section of Taxation, Committee on Tax Structure and Simplification; former Chair, American Bar Association, Section of Taxation, Phaseout Tax Elimination Project; former member, American Bar Association, Section of Taxation, Task Force on Pass-Through Entities; former member, American Bar Association, Section of Taxation, Task Force on Legislative Recommendation No. 86-1; former member, Philadelphia Bar Association Tax Section; author and owner, TaxJEM Inc., publisher of computer assisted legal instruction programs; owner, JEMBook Publishing Company, publisher of law and genealogy books; author of numerous books, monographs, and book chapters; contributor to various tax periodicals. 

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

A. Overview

B. Historical Background

II. Qualified Economically Distressed Areas

A. In General

B. Empowerment Zone

1. In General

a. Identification

b. Rural and Urban Areas

c. Indian Reservation Land

d. Appropriate Secretaries

e. Designation Process

2. Conditions for Designation

3. Eligibility Criteria

a. In General

b. Population Criterion

c. Distress Criterion

d. Size Criterion

e. Poverty Criterion

C. Enterprise Communities

1. In General

a. Identification

b. Rural and Urban Areas

c. Indian Reservation Land

d. Appropriate Secretaries

e. Designation Process

2. Conditions for Designation

3. Eligibility Criteria

a. In General

b. Poverty Criterion

D. Renewal Communities

1. In General

2. Designation Procedures

3. Period Designation Effective

4. Area and Eligibility Requirements

a. In General

b. Area Requirements

c. Eligibility Requirements

d. Other Relevant Factors

e. Expansion of Designated Area Based on 2000 Census Data

5. Required State and Local Commitments

a. In General

b. Course of Action Requirement

c. Economic Growth Promotion Requirement

6. Treatment of Governments

E. District of Columbia Enterprise Zone

1. In General

2. Designation Process

F. New York Liberty Zone

G. Gulf Opportunity Zones

1. Gulf Opportunity Zone

2. Rita GO Zone

3. Wilma GO Zone

H. Kansas Disaster Area

I. Midwestern Disaster Area

J. Federally Declared Disasters Occurring After December 31, 2007

III. Economically Distressed Area Assets

A. In General

B. Enterprise Zone Business

1. In General

2. Qualified Business Entity

3. Qualified Proprietorship

4. Qualified Business

a. In General

b. Real Property Rental

c. Personal Property Rental

d. Holding Intangibles

e. Certain Entertainment Facilities

f. Farming

5. Nonqualified Financial Property

6. Zone Boundary Businesses

C. Renewal Community Business

1. In General

2. Qualified Business Entity

3. Qualified Proprietorship

4. Qualified Business

a. In General

b. Real Property Rental

c. Personal Property Rental

5. Nonqualified Financial Property

6. Community Boundary Businesses

D. Qualified Zone Property

E. Qualified Renewal Property

F. DC Zone Assets

1. In General

2. DC Zone Business Stock

3. DC Zone Partnership Interest

4. DC Zone Business Property

5. DC Zone Business

6. Safe Harbor Rules

a. Subsequent Purchasers and Holders

b. Cessation of Qualification for Property Held for More Than Five Years

G. Qualified New York Liberty Zone Property

1. In General

2. Special Rules

3. Eligible Real Property

4. Exceptions

a. In General

b. Election to Forgo Benefit

c. Qualified New York Liberty Zone Leasehold Improvement Property

H. Qualified Community Asset

1. In General

2. Qualified Community Stock

3. Qualified Community Partnership Interest

4. Qualified Community Business Property

5. Safe Harbor Rules

a. Subsequent Purchasers and Holders

b. Cessation of Qualification for Property Held for More Than Five Years

I. Qualified Empowerment Zone Asset

1. In General

2. Qualified Empowerment Zone Stock

3. Qualified Empowerment Zone Partnership Interest

4. Qualified Empowerment Zone Business Property

5. Safe Harbor Rules

a. Subsequent Purchasers and Holders

b. Cessation of Qualification for Property Held for More Than Five Years

J. Qualified Revitalization Building

K. Qualified Equity Investment

1. In General

a. Basic Requirements

b. Time Limitations

c. Substantially All

2. Qualified Low-Income Community Investment

a. In General

b. Accounting for Payments

c. Qualified Active Low-Income Community Business

(1) In General

(2) Qualified Business

(3) Time Requirement

3. Qualified Community Development Entity

4. Low-Income Community

L. Qualified Gulf Opportunity Zone Property

1. In General

2. Special Rules

3. Exceptions

a. In General

b. Election to Forgo Benefit

M. Qualified Recovery Assistance Property

IV. Tax Benefits for Qualified Economically Distressed Areas and Assets

A. In General

B. Renewal Community Capital Gain Exclusion

1. In General

2. Qualified Capital Gain

a. In General

b. Pass-through Entities

c. Transfers

d. Contributions to Capital

e. Certain Short Positions

f. Certain Dispositions of Partnerships and S Corporations

C. DC Zone Asset Capital Gain Exclusion

1. In General

2. Qualified Capital Gain

a. In General

b. Pass-through Entities

c. Transfers

d. Contributions to Capital

e. Certain Short Positions

f. Certain Dispositions of Partnerships and S Corporations

D. Enterprise Zone Qualified Business Entity Stock Gain Exclusion

1. In General

a. Qualification

b. Cessation of Qualification

c. Limitation

2. Qualified Small Business Stock

a. In General

b. Qualified Small Business

c. Active Business Requirements

(1) In General

(2) Special Rules

(a) Preliminary Activities

(b) Subsidiaries

(c) Working Capital

(d) Computer Software Royalties

(e) Specialized Small Business Investment Companies

(3) Qualified Trade or Business

(4) Eligible Corporation

3. Treatment of Pass-Through Entities

4. Certain Offsetting Short Positions

E. Empowerment Zone Investment Rollover Gain Nonrecognition

1. In General

2. Ineligible Gain

3. Purchase

F. New York Liberty Zone Property Involuntary Conversion Nonrecognition

G. Increase in § 179 Expensing

1. In General

2. Enterprise Zone Businesses

3. Qualified Renewal Property

4. Qualified New York Liberty Zone Property

5. Qualified § 179 Gulf Opportunity Zone Property

6. Qualified § 179 Recovery Assistance Property

7. Qualified § 179 Disaster Assistance Property

H. New York Liberty Zone Property Depreciation

1. Qualified New York Liberty Zone Property

2. Qualified New York Liberty Zone Leasehold Improvement Property

I. Commercial Revitalization Deduction

1. In General

2. Election

3. Qualified Revitalization Expenditures

4. Dollar Limitation

a. In General

b. Commercial Revitalization Expenditure Amount

c. Timing Requirement

d. Commercial Revitalization Agency Responsibilities

(1) In General

(2) Allocation Procedures

J. Empowerment Zone Employment Credit

1. In General

2. Computation of Credit

3. Qualified Zone Wages

a. In General

b. Wages

(1) In General

(2) Special Rules

(a) Agricultural and Railway Labor

(b) Successor Employers

(c) Employees Performing Services for Other Persons

(3) Exceptions

(a) On-the-Job Training Payments

(b) Work Supplementation Payments

(c) Payments During Labor Disputes

(4) Wages So Treated for Empowerment Zone Employment Credit

4. Qualified Zone Employee

a. Eligible Employees

b. Ineligible Employees

(1) In General

(2) Related Individuals

(3) Five Percent Owners

(4) Short-Term Employees

(5) Recreational Employees

(6) Farm Employees

5. Special Rules with Respect to Employers

a. Employers Under Common Control

(1) In General

(2) Common Control

(a) In General

(b) Parent-Subsidiary Group

(c) Brother-Sister Group

(d) Combined Group

(e) Special Rules

b. Tax Exempt Organizations

c. Estates and Trusts

d. Regulated Investment Companies and Real Estate Investment Trusts

e. Farmers’ and Other Cooperatives

K. New York Liberty Zone Work Opportunity Credit

1. In General

2. Summary of Work Opportunity Credit

3. New York Liberty Zone Employee

4. New York Liberty Zone Business

5. Adjustments to Computation of Credit

L. Qualified Zone Academy Bond Credit

1. In General

2. Computation of Credit

a. In General

b. Limitation

3. Qualified Zone Academy Bond

4. Limitation on Amount of Designated Bonds

M. First-Time D.C. Homebuyer Credit

1. In General

2. Income Limitation

3. First-Time Homebuyer

4. Carryover

5. Purchase

N. New Markets Credit

1. In General

2. Computation of Credit

3. National Designated Investment Limitation

4. Regulations, Guidance, and Reports

a. In General

b. Information Acquisition

c. Reporting Requirements

d. Expansion of New Markets Tax Credit for Businesses Serving Targeted Populations

O. Enterprise Zone Tax-Exempt Financing

1. In General

2. Enterprise Zone Facility

a. In General

b. Qualified Zone Property

c. Enterprise Zone Business

3. Limitation on Amount of Bonds

a. In General

b. New Empowerment Zone Facility Bonds

4. Penalty for Ceasing to Meet Requirements

P. New York Liberty Zone Tax-Exempt Financing

1. In General

2. Qualified New York Liberty Bond

3. Limitation on Amount of Bonds

4. Advance Refundings of Qualified Existing Bonds

a. In General

b. Qualified Existing Bond

c. Limitation on Amount of Bonds

V. Tax Benefits for Disaster Areas

A. Background

B. Gulf Opportunity Zone

1. 2005 KETRA Provisions

a. In General

b. 2005 KETRA Provisions Codified by Gulf Opportunity Zone Act of 2005

c. Other 2005 KETRA Provisions

(1) Work Opportunity Tax Credit for Hurricane Katrina Employees

(2) Additional Exemption for Housing Hurricane Katrina Displaced Individuals

(3) Increase in Standard Mileage Rate for Charitable Use of Vehicles

(4) Mileage Reimbursements to Charitable Volunteers Excluded from Gross Income

(5) Charitable Deduction for Contributions of Food Inventory

(6) Charitable Deduction for Contributions of Book Inventories to Public Schools

(7) Exclusion of Certain Cancellation of Indebtedness by Reason of Hurricane Katrina

(8) Extension of Replacement Period for Nonrecognition of Gain for Property Located in Hurricane Katrina Disaster Area

2. Gulf Opportunity Zone Tax-Exempt Financing

a. In General

b. Qualified Gulf Opportunity Zone Bond

c. Limitation on Bonds

d. Advance Refundings of Described Bonds

(1) In General

(2) Limitation on Amount of Bonds

3. Gulf Opportunity Zone Deductions

a. Net Operating Losses

(1) Gulf Opportunity Zone Net Operating Losses

(a) In General

(b) Qualified Gulf Opportunity Zone Casualty Losses

(c) Moving Expenses

(d) Temporary Housing Expenses

(e) Depreciation of Gulf Opportunity Zone Property

(f) Repair Expenses

(g) Other Rules

(2) Five-Year Net Operating Loss Carryback for Certain Timber Losses

b. Expensing Provisions

(1) Increased § 179 Expensing

(2) Expensing for Certain Demolition and Clean-Up Costs

(3) Extension of Expensing for Environmental Remediation Costs

(4) Special Expensing Rules for Small Timber Producers

c. Special Rules for Gulf Opportunity Zone Public Utilities

(1) Special Rule for Gulf Opportunity Zone Public Utility Casualty Losses

(2) Treatment of Public Utility Disaster Losses

d. Temporary Suspension of Limitations on Charitable Contributions

4. Gulf Opportunity Zone Credits

a. Gulf Opportunity Zone Low Income Housing Credit

(1) Income Targeting

(2) Credit Cap

(3) Basis of Building Eligible for the Credit

(4) Carryover Rule

(5) Stacking Rule

b. Increase in the Rehabilitation Credit

c. Employer Credit/Employee Exclusion for Housing Employees Affected by Hurricane Katrina

(1) In General

(2) Qualified Employer

(3) Qualified Employee

(4) Special Rules

d. Credit to Holders of Gulf Tax Credit Bonds

(1) In General

(2) Information Reporting for Gulf Tax Credit Bonds

(3) Treatment of Credit by Holders of Gulf Tax Credit Bonds

e. New Markets Tax Credit Under 2005 GOZA

f. Increase in Education Credits

(1) Hope Scholarship Credit

(2) Lifetime Learning Credit

g. Employee Retention Credit for Employers Affected by Hurricane Katrina

(1) In General

(2) Credit Amount

(3) Qualified Employer

(4) Qualified Employee

(5) Qualified Wages

(6) Special Rules

h. Employee Retention Credit for Employers Affected by Hurricane Rita

(1) In General

(2) Credit Amount

(3) Qualified Employer

(4) Qualified Employee

(5) Qualified Wages

(6) Special Rules

i. Employee Retention Credit for Employers Affected by Hurricane Wilma

(1) In General

(2) Credit Amount

(3) Qualified Employer

(4) Qualified Employee

(5) Qualified Wages

(6) Special Rules

5. Qualified Gulf Opportunity Zone Property Depreciation

a. In General

b. Qualified GO Zone Property

(1) Substantially All and Active Conduct Requirements

(2) Election Not to Deduct GO Zone Additional First-Year Depreciation

c. Property Not Eligible For GO Zone Additional First-Year Depreciation

d. Recapture Rules

6. Qualified Plan Provisions

a. In General

b. Tax Favored Withdrawals from Retirement Plans

c. Recontribution of Withdrawals for Home Purchases

d. Loans from Qualified Plans

e. Plan Amendments

7. Other Tax Relief Provisions

a. Suspension of Certain Limitations on Personal Casualty Losses

b. Increased § 7508A IRS Authority

c. Special Rules for Determining Earned Income

d. Special IRS Authority to Make Adjustments Regarding Taxpayer and Dependency Status

e. Special Rules for Mortgage Revenue Bonds

C. Kansas Disaster Area Deductions

1. Kansas Disaster Area Deductions

a. Kansas Disaster Area Net Operating Losses

(1) In General

(2) Qualified Recovery Assistance Casualty Losses

(3) Moving Expenses

(4) Temporary Housing Expenses

(5) Depreciation of Kansas Disaster Area Property

(6) Repair Expenses

(7) Other Rules

b. Increased § 179 Expensing

c. Expensing for Certain Demolition and Clean-Up Costs

d. Special Rules for Kansas Disaster Area Public Utilities Disaster Losses

2. Kansas Disaster Area Employee Retention Credit

a. In General

b. Credit Amount

c. Qualified Employer

d. Qualified Employee

e. Qualified Wages

f. Special Rules

3. Qualified Recovery Assistance Property Depreciation

a. In General

b. Qualified Recovery Assistance Property

(1) Substantially All and Active Conduct Requirements

(2) Claiming Kansas Disaster Area Additional First-Year Depreciation Deduction

(3) Election Not to Deduct Kansas Disaster Area Additional First-Year Depreciation

c. Recapture Rules

4. Qualified Plan Provisions

a. In General

b. Tax Favored Withdrawals from Retirement Plans

c. Recontribution of Withdrawals for Home Purchases

d. Loans from Qualified Plans

e. Plan Amendments

5. Other Tax Relief Provisions

a. Suspension of Limitations on Personal Casualty Losses

b. Extension of Replacement Period for Nonrecognition of Gain for Property Located in the Kansas Disaster Area

D. Midwestern Disaster Area

1. Midwestern Disaster Area Tax Exempt Financing

a. In General

b. Qualified Midwestern Disaster Area Bond

c. Limitation on Bonds

2. Midwestern Disaster Area Deductions

a. Midwestern Disaster Area Net Operating Losses

(1) In General

(2) Qualified Disaster Recovery Assistance Casualty Loss

(3) Moving Expenses

(4) Temporary Housing Expenses

(5) Depreciation of Midwestern Disaster Area Property

(6) Repair Expenses

(7) Other Rules

b. Expensing Provisions

(1) Increased § 179 Expensing

(2) Expensing for Certain Demolition and Clean-Up Costs

(3) Extension of Expensing for Environmental Remediation Costs

c. Temporary Suspension of Limitations on Charitable Contributions

3. Midwestern Disaster Area Credits

a. Midwestern Disaster Area Low-Income Housing Credit

(1) Credit Cap

(2) Stacking Rule

b. Increase in Rehabilitation Credit

c. Employer Credit/Employee Exclusion for Housing Employees Affected by the Midwestern Disasters

(1) In General

(2) Qualified Employer

(3) Qualified Employee

(4) Special Rules

d. Credit for Holders of Midwestern Tax Credit Bonds

(1) In General

(2) Information Reporting for Midwestern Tax Credit Bonds

(3) Treatment of Credit by Holders of Midwestern Tax Credit Bonds

e. Employee Retention Credit for Employers Affected by the Midwestern Disasters

(1) In General

(2) Credit Amount

(3) Qualified Employer

(4) Qualified Employee

(5) Qualified Wages

(6) Special Rules

f. Increase in Education Credits

(1) Hope Scholarship Credit

(2) Lifetime Learning Credit

4. Midwestern Disaster Area Additional Depreciation

5. Qualified Plan Provisions

a. In General

b. Tax Favored Withdrawals from Retirement Plans

c. Recontribution of Withdrawals for Home Purchases

d. Loans from Qualified Plans

e. Plan Amendments

6. Other Tax Relief Provisions

a. Suspension of Limitations on Personal Casualty Losses

b. Increased § 7508A IRS Authority

c. Special Rules for Determining Earned Income

d. Special IRS Authority to Make Adjustments Regarding Taxpayer and Dependency Status

e. Special Rules for Mortgage Revenue Bonds

f. Additional Exemption for Housing Midwestern Disaster Area Displaced Individuals

g. Increase in Standard Mileage Rate for Charitable Use

h. Mileage Reimbursement to Charitable Volunteers Excluded from Gross Income

i. Exclusion of Certain Cancellation of Indebtedness

j. Extension of Replacement Period for Nonrecognition of Gain

E. Hurricane Ike Disaster Relief

1. Hurricane Ike Tax-Exempt Bonds

a. In General

b. Qualified Hurricane Ike Disaster Area Bond

c. Limitation on Bonds

2. Hurricane Ike Disaster Area Low-Income Housing Credit

a. Credit Cap

b. Stacking Rule

F. Federally Declared Disaster Areas After December 31, 2007

1. Waiver of 10% Casualty Loss Limitation, Increase in Standard Deduction by Disaster Casualty Loss, and Increase in Limitation Per Casualty Loss

2. Expensing of Qualified Disaster Expenses

3. Loss Carryback Extension from 2 to 5 Years

4. Additional 50% First-Year Depreciation

a. In General

b. Qualified Disaster Assistance Property

(1) Substantially All and Active Conduct Requirement

(2) Electing Not to Deduct Qualified Disaster Assistance Additional First-Year Depreciation

c. Recapture Rules

5. Additional § 179 Expensing

VI. Tax Detriments

A. In General

B. Basis Reductions

1. Empowerment Zone Investment Rollover Gain Nonrecognition

2. New York Liberty Zone Property Depreciation

3. Gulf Opportunity Zone/Kansas Disaster Area Property Depreciation

4. Increased § 179 Expensing

5. Commercial Revitalization Deduction

6. First-Time D.C. Homebuyer Credit

7. New Markets Credit

8. Cellulosic Biofuel Plant Property Depreciation

C. Deduction Reductions

1. Empowerment Zone Employment Credit

2. New York Liberty Zone Work Opportunity Credit

D. Income Recaptures

1. Qualified Zone Academy Bond Credit

2. Increased § 179 Expensing

3. Commercial Revitalization Deduction

4. New Markets Credit

5. Gulf Casualty Losses and Subsequent Government Grants


WORKING PAPERS

Table of Worksheets

Other Resources

Worksheet 1 New Markets Tax Credit Allocation Agreement Q& A

Worksheet 2 Notice 94–102, 1994–50 I.R.B. 14 (Listing of CDCs)

Worksheet 3 Sec. 15345. (Temporary Tax Relief for Kiowa County, Kansas and Surrounding Area) Provisions of the Food, Conservation, and Energy Act of 2008 (2008 FCEA) (P.L. 110-246)

Worksheet 4 Links to Lists of New Markets Tax Credit Allocation Recipients Since 2002

Worksheet 5 Disaster Relief Chart

Worksheet 6 § § 701-712 of the 2008 Tax Extenders Act, Division C. Tax Provisions Related to Disaster Relief

Bibliography