Expansion of Work Opportunity Tax Credit for Certain Employees in New York

The Act expands the list of targeted groups eligible for the work opportunity tax credit to include individuals who perform substantially all of their services in:

• The New York Liberty Zone for a business located in the New York Liberty Zone, or
• Elsewhere in New York City, if the business relocated from the New York Liberty Zone because of the physical destruction or damage to its workplace by the September 11, 2001 terrorist attack.

The New York Liberty Zone is an area around the site of the World Trade Center, on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway) in the Borough of Manhattan in the City of New York.

This credit -- 40 percent of up to $6,000 of wages per employee each year -- for the new targeted group is for existing employees and rehires, as well as new hires. The general limitation of the credit to first-year wages does not apply to the new group. The credit may offset tax liability even if it is reduced below tentative minimum tax.

For businesses relocating elsewhere in New York City, the Act generally limits the number of employees eligible for the credit to the number of employees the employer had in the New York Liberty Zone on September 11, 2001. Employers with an average of more than 200 employees on business days during the tax year may not claim the credit.

The credit is allowed for wages paid or incurred to qualified individuals for work during 2002 and 2003.

Special Depreciation Allowance for Certain Property

The Act provides a special 30-percent bonus depreciation for certain qualified property acquired after September 10, 2001, and used in the New York Liberty Zone.

The Liberty Zone bonus is available for certain property that is not eligible for the general bonus depreciation. The Liberty Zone bonus is allowed for the costs of rehabilitating or replacing nonresidential and residential real property that was damaged, destroyed, or condemned as a result of the September 11, 2001 terrorist attack. For such real property, the Liberty Zone bonus is available if the property is placed in service by December 31, 2009.

The Liberty Zone bonus is also generally available for property acquired and placed in service through 2006 that otherwise would have been eligible for the general bonus depreciation, but does not satisfy the 2004 acquisition and placed-in-service dates that apply for the general bonus depreciation.

However, qualified leasehold improvements in the Liberty Zone do not qualify for the Liberty Zone bonus.

The other rules for the general 30-percent bonus depreciation generally apply to the Liberty Zone bonus, including the rule that the property generally must be acquired by the taxpayer after September 10, 2001.

Example

In 2002, the taxpayer acquires and places in service qualified property within the New York Liberty Zone that costs $1 million. The taxpayer is allowed a special deduction of $300,000. The remaining $700,000 of adjusted basis is recovered in 2002 and subsequent years pursuant to the depreciation rules.

Authorization of Tax-Exempt Private Activity Bonds

The Act authorizes the issuance of $8 billion of exempt facility bonds to finance the construction and rehabilitation of commercial and residential rental real property located in the New York Liberty Zone. Property eligible for financing includes buildings and their structural components, fixed tenant improvements, and public utility property, as designated by either the Mayor of New York City or the Governor of New York. The bonds may be issued after the date of enactment (March 9, 2002) and before 2005. If the Mayor or Governor determines that it is not feasible to use all of the authorized bond proceeds for property located in the designated areas, up to $1 billion may be used for construction and rehabilitation of nonresidential real property located in other areas within New York City.

Some of the rules applicable to the issuance of exempt facility private activity bonds will not apply to these bonds.

Allow One Additional Advance Refunding for Certain Previously Refunded Bonds

The Act permits up to $9 billion of eligible bonds issued to finance certain facilities located in New York City to be "advance refunded" one additional time.

Eligible bonds are those (1) for which advance refunding authority was exhausted before September 12, 2001, and (2) with respect to which the advance refunding was outstanding on September 11, 2001. Bonds must be designated as eligible bonds by the Mayor of New York City or the Governor of New York State. Up to $4.5 billion of bonds may be designated by each of these officials.

Eligible bonds are:

• Governmental general obligation bonds of New York City
• Governmental bonds issued by the Metropolitan Transportation Authority of the State of New York
• Governmental bonds issued by the New York Municipal Water Finance Authority
• Qualified 501(c)(3) bonds issued by or on behalf of New York State or New York City to finance hospital facilities (as defined in section 145(c))

Increase in Expensing Under Section 179 for Business Property Used in the New York Liberty Zone

The Act increases the amount a taxpayer can deduct under section 179 to include up to an additional $35,000 per year of qualified property that is used in the New York Liberty Zone. Generally, qualified property must be purchased and placed in service by the taxpayer after September 10, 2001, and before 2007. Substantially all of its use must be in an active trade or business in the New York Liberty Zone, and the taxpayer must begin such use in the Zone after September 10, 2001.

Section 179 allows a taxpayer to elect to treat as an expense the cost of up to $25,000 of tangible personal property ($24,000 in 2001 and 2002). The deduction must be reduced to the extent more than $200,000 of such property is placed in service during the year. Under the Act, the reduction is 50 cents per dollar for qualified property used in the New York Liberty Zone (the general reduction is dollar for dollar for section 179 property).

The Act authorizes the Secretary of the Treasury to issue regulations providing for the recapture of the additional section 179 benefit if the property is removed from the New York Liberty Zone.

Extension of Replacement Period for Certain Property Involuntarily Converted

Upon an involuntary conversion of property, a taxpayer generally may elect not to recognize gain with respect to the conversion if the taxpayer acquires within a designated period property similar to or related in service or use to the converted property ("replacement property"). If a taxpayer elects to purchase replacement property and trigger the nonrecognition provision, gain on the converted property is recognized only to the extent that the amount realized on the conversion exceeds the cost of the replacement property. In general, the replacement period begins with the date of the disposition of the converted property and ends two years after the close of the first tax year in which any part of the gain on conversion is realized.

The Act extends the replacement period to five years for property destroyed as a result of the September 11, 2001 terrorist attack in the New York Liberty Zone. The five-year period is available only if substantially all of the use of the replacement property is in New York City.

Treatment of Qualified Leasehold Improvement Property

The Act treats qualified leasehold improvement property located in the New York Liberty Zone as 5-year property for depreciation purposes. The straight line method of depreciation must be used. For purposes of the alternative depreciation system, the property has a 9-year recovery period.

Qualified leasehold improvement property is property placed in service after September 10, 2001, and before January 1, 2007, and includes any improvement to an interior portion of a building that is nonresidential real property (generally a commercial building) if the building is located in the New York Liberty Zone. The improvement must be made under or pursuant to a lease either by the lessee (or a sublessee) of that portion of the building or by the lessor of that portion of the building. For this purpose, a lease between related persons is not considered a lease. The portion of the building that includes the improvement must be occupied exclusively by the lessee (or any sublessee). The improvement must be placed in service more than three years after the date the building was first placed in service.

Qualified leasehold improvement property does not include improvements that:

• Enlarge the building
• Are for elevators or escalators
• Are to structural components benefiting a common area
• Are to the internal structural framework of the building.

Without the special rule, improvements in most cases would be subject to the 39-year depreciation recovery period. Liberty Zone qualified leasehold improvements are not eligible for 30-percent bonus depreciation.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser.