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Salvage tax breaks under new disaster-relief laws

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in Employee Benefits Program,Human Resources,Small Business Tax,Small Business Tax Deduction Strategies

In the waning days of last year, the president inked the Gulf Opportunity Zone Act of 2005. This new legislation, following close on the heels of the Katrina Emergency Tax Relief Act (KETRA), includes various tax measures benefiting victims of Hurricanes Katrina, Rita and Wilma.

Advice: Don’t think these are just Gulf-region tax breaks. Even if you don’t live in the disaster area, you still may be entitled to claim special deductions when you file your corporate 2005 return. What’s more, some of the new law provisions extend into 2006 and beyond.

Here’s a quick rundown on the key tax provisions for business owners:

Employee retention credits. Qualified employers in the Katrina area can claim a 40 percent tax credit of up to $6,000 in wages paid to employees between Aug. 28 and Dec. 31, 2005. Qualified employers in the Rita disaster area can claim the credit for wages paid between Sept. 24 and Dec. 31, 2005. And in the Wilma area, the credit is for wages paid between Oct. 24 and Dec. 31, 2005.

Those credits are available to any size business if its operations were shut down due to one of those hurricanes.

Work Opportunity Tax Credits. If you hired workers from certain disadvantaged groups, you can qualify for the Work Opportunity Tax Credit (WOTC). The credit is equal to 40 percent of the first $6,000 of wages paid to a targeted group member in the first year. In general, the WOTC expired at the end of 2005. But it can still be claimed for people hired to work in the Hurricane Katrina disaster area during the two-year period beginning Aug. 28, 2005.

Bonus depreciation deductions. Besides regular depreciation deductions, businesses in the Gulf Opportunity Zone regions can claim an immediate 50 percent “bonus depreciation” deduction for certain purchases, including computers, computer software, equipment and real estate. Normally, these business assets must be depreciated over several years.

Expensing deductions. For small businesses operating in the Gulf Opportunity Zone, the maximum amount they can expense under Section 179 increases by $100,000. Those businesses may be able to expense as much as $205,000 in 2005 ($105,000 regular allowance plus $100,000).

Cleanup costs. Taxpayers can claim a deduction equal to 50 percent of the cleanup expenses incurred between Aug. 28, 2005, and Dec. 31, 2007. A qualified cleanup expense is defined as the amount paid for removal of debris from structures or real estate within the Gulf Opportunity Zone.

Rehabilitation credits. The rehab tax credit increases from 10 percent to 13 percent for eligible costs of renovating buildings in the Gulf Opportunity Zone. It increases from 20 percent to 26 percent for qualified historic structures.

Employer-provided housing. Eligible employees are allowed to exclude tax on up to $600 for lodging provided by employers in the Gulf Opportunity Zone. The measure provides a tax credit to the employer equal to 30 percent of the amount the employee excludes from taxable income.

New markets tax credit. The new law provides an additional $300 million in tax credits for businesses locating in qualified communities in 2005 and $2006, and $400 million in 2007. A business investing in a designated low-income community can take a 39 percent tax credit over seven years.

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