Tax Incentives for Economically Distressed Areas, written by James Edward Maule, Esq., Professor of Law at Villanova University School of Law, brings together in one place analyses of the many income tax provisions designed to encourage business activity and investment in economically distressed areas and federally declared disaster areas.
This Portfolio separates the analyses into four categories. It also presents a history of the provisions as they have been added, expanded, and modified.
First, this Portfolio discusses the six types of qualified distressed areas. This permits the practitioner to compare and contrast the regions Congress has selected for tax-targeted assistance.
Second, Tax Incentives for Economically Distressed Areas discusses the 11 types of qualified assets. This permits the practitioner to not only 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.
This Portfolio then analyzes the 19 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.
Finally, this Portfolio describes the 12 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, and income recaptures.
Tax Incentives for Economically Distressed Areas allows you to benefit from:
This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which covers every federal tax topic with expert, in-depth analysis, and offers commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.
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
b. Poverty Criterion
D. Renewal Communities
2. Designation Procedures
3. Period Designation Effective
4. Area and Eligibility Requirements
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
b. Course of Action Requirement
c. Economic Growth Promotion Requirement
6. Treatment of Governments
E. District of Columbia Enterprise Zone
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
B. Enterprise Zone Business
2. Qualified Business Entity
3. Qualified Proprietorship
4. Qualified Business
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
6. Community Boundary Businesses
D. Qualified Zone Property
E. Qualified Renewal Property
F. DC Zone Assets
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
2. Special Rules
3. Eligible Real Property
4. Exceptions
b. Election to Forgo Benefit
c. Qualified New York Liberty Zone Leasehold Improvement Property
H. Qualified Community Asset
2. Qualified Community Stock
3. Qualified Community Partnership Interest
4. Qualified Community Business Property
5. Safe Harbor Rules
I. Qualified Empowerment Zone Asset
2. Qualified Empowerment Zone Stock
3. Qualified Empowerment Zone Partnership Interest
4. Qualified Empowerment Zone Business Property
J. Qualified Revitalization Building
K. Qualified Equity Investment
a. Basic Requirements
b. Time Limitations
c. Substantially All
2. Qualified Low-Income Community Investment
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
3. Exceptions
M. Qualified Recovery Assistance Property
IV. Tax Benefits for Qualified Economically Distressed Areas and Assets
B. Renewal Community Capital Gain Exclusion
2. Qualified Capital Gain
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
D. Enterprise Zone Qualified Business Entity Stock Gain Exclusion
a. Qualification
b. Cessation of Qualification
c. Limitation
2. Qualified Small Business Stock
b. Qualified Small Business
c. Active Business Requirements
(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
2. Ineligible Gain
3. Purchase
F. New York Liberty Zone Property Involuntary Conversion Nonrecognition
G. Increase in § 179 Expensing
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
2. Election
3. Qualified Revitalization Expenditures
4. Dollar Limitation
b. Commercial Revitalization Expenditure Amount
c. Timing Requirement
d. Commercial Revitalization Agency Responsibilities
(2) Allocation Procedures
J. Empowerment Zone Employment Credit
2. Computation of Credit
3. Qualified Zone Wages
b. Wages
(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
(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
(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
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
b. Limitation
3. Qualified Zone Academy Bond
4. Limitation on Amount of Designated Bonds
M. First-Time D.C. Homebuyer Credit
2. Income Limitation
3. First-Time Homebuyer
4. Carryover
5. Purchase
N. New Markets Credit
3. National Designated Investment Limitation
4. Regulations, Guidance, and Reports
b. Information Acquisition
c. Reporting Requirements
d. Expansion of New Markets Tax Credit for Businesses Serving Targeted Populations
O. Enterprise Zone Tax-Exempt Financing
2. Enterprise Zone Facility
b. Qualified Zone Property
c. Enterprise Zone Business
3. Limitation on Amount of Bonds
b. New Empowerment Zone Facility Bonds
4. Penalty for Ceasing to Meet Requirements
P. New York Liberty Zone Tax-Exempt Financing
2. Qualified New York Liberty Bond
4. Advance Refundings of Qualified Existing Bonds
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
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
b. Qualified Gulf Opportunity Zone Bond
c. Limitation on Bonds
d. Advance Refundings of Described Bonds
(2) Limitation on Amount of Bonds
3. Gulf Opportunity Zone Deductions
a. Net Operating Losses
(1) Gulf Opportunity Zone Net Operating Losses
(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
(2) Qualified Employer
(3) Qualified Employee
(4) Special Rules
d. Credit to Holders of Gulf Tax Credit Bonds
(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
(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
i. Employee Retention Credit for Employers Affected by Hurricane Wilma
5. Qualified Gulf Opportunity Zone Property Depreciation
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
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
(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
b. Credit Amount
c. Qualified Employer
d. Qualified Employee
e. Qualified Wages
f. Special Rules
3. Qualified Recovery Assistance Property Depreciation
b. Qualified Recovery Assistance Property
(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
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
b. Qualified Midwestern Disaster Area Bond
2. Midwestern Disaster Area Deductions
a. Midwestern Disaster Area Net Operating Losses
(2) Qualified Disaster Recovery Assistance Casualty Loss
(5) Depreciation of Midwestern Disaster Area Property
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
d. Credit for Holders of Midwestern Tax Credit Bonds
(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
4. Midwestern Disaster Area Additional Depreciation
5. Qualified Plan Provisions
6. Other Tax Relief Provisions
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
b. Qualified Hurricane Ike Disaster Area Bond
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
b. Qualified Disaster Assistance Property
(1) Substantially All and Active Conduct Requirement
(2) Electing Not to Deduct Qualified Disaster Assistance Additional First-Year Depreciation
5. Additional § 179 Expensing
VI. Tax Detriments
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
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