IRS Logo
Print - Click this link to Print this page

FAQs for Hurricane Victims - Bonus Depreciation (including GO Zone)

FAQs for Hurricane Victims, Victims of the May 4, 2007, Kansas Storms and Tornadoes, and Victims of the Midwestern Area Disasters of 2008 - Bonus Depreciation (including GO Zone)

General comment from IRS Counsel: The definition of GO Zone property for bonus depreciation is the same as or similar to the definition of qualified property for bonus depreciation under section 168(k) or the definition of qualified New York Liberty Zone property for bonus depreciation under section 1400L(b). There are regulations under both Code sections (i.e., sections 1.168(k)-1 and 1.1400L(b)-1), which persons should refer to. Persons should also refer to Notice 2006-77 (issued October 2, 2006, in the 2006-40 Internal Revenue Bulletin), which provides some guidance on the bonus depreciation deduction for GO Zone property. Persons should refer to Publication 4492-A, Information for Taxpayers Affected by the May 4, 2007, Kansas Storms and Tornadoes for GO Zone provisions that pertain to the May 4, 2007, Kansas storms and tornadoes, and to Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas for GO Zone provisions that pertain to the Midwestern disaster areas.

(03/09) Q: A business’s building is severely damaged by the storm. Can it claim the additional 50 percent depreciation in the following circumstances?

  • Business spends $450,000 restoring the building it operated in before the storm and an additional $600,000 expanding it.
  • Business buys another pre-existing building in New Orleans for $1 million and spends another $450,000 adapting this building to its needs.

A: These two questions deal with the original use requirement, which is one of the five requirements for satisfying the definition of GO Zone property. Section 2.02(3) of Notice 2006-77 addressed this original use requirement. This section provides that rules similar to the original use rules in section 1.168(k)-1(b)(3) apply. In addition, used property will satisfy the GO Zone original use requirement so long as that property has not been previously used within the GO Zone. (For these two questions, we have assumed the building is not rental property.)

  • Yes, assuming the improvements comprising the $1,050,000 are GO Zone property (e.g., the improvements are new components or are used components that are used for the first time in the GO Zone).
  • No for the $1 million cost of the building because it does not satisfy the original use requirement. Yes for the $450,000 of additional capital expenditures to rebuild or recondition the building, assuming the improvements comprising the $450,000 are GO Zone property (e.g., the improvements are new components or are used components that are used for the first time in the GO Zone).

The same information would apply with respect to the May 4, 2007, Kansas storms and tornadoes, and the Midwestern disasters of 2008.

For more information on these disasters, see:

(03/09) Q: In 2006, a business constructs a new building in the Katrina core area. In 2007, the business exchanges the building for another building in an exchange qualifying for tax-free treatment under section 1031.

  • Is recapture of the bonus depreciation required if the building received in the 1031 exchange is located in the Katrina core area?
  • Does it make a difference whether the replacement building had been placed in service by another taxpayer before August 29 or was itself a new building?
  • Is recapture of the bonus depreciation required if the building received in the 1031 exchange is located outside the Katrina disaster area?

A: These questions deal with the recapture provision in section 1400N(d)(5), which does not exist in section 168(k) bonus or section 1400L(b) Liberty Zone bonus. The recapture provision is addressed in section 6 of Notice 2006-77. This section provides that if GO Zone property is no longer GO Zone property in the hands of the same taxpayer at any time before the end of the GO Zone property’s recovery period, then the taxpayer must recapture in the taxable year in which the GO Zone property is no longer GO Zone property (the recapture year) the benefit derived from claiming the GO Zone bonus depreciation for that property. The determination of this benefit also is addressed in section 6 of Notice 2006-77. With respect to these questions, the new building constructed in 2006 is no longer GO Zone property in the hands of the same taxpayer when it is exchanged for another building in 2007.

The same information would apply with respect to the May 4, 2007, Kansas storms and tornadoes, and the Midwestern disasters of 2008.

For more information on these disasters, see:

(03/09) Q: Regarding rental property – three scenarios:

  • A taxpayer operates multiple rental units. In November 2005, he acquires a new apartment house under construction and places it in service in February 2006. Does he qualify for the 50 percent bonus depreciation?
  • A taxpayer had no rental property as of August 29, 2005. In December he acquires seven new houses (never previously placed in service) in the GO Zone, which he rents to displaced Katrina victims. Does he qualify for the 50 percent bonus depreciation?
  • A taxpayer had no rental property as of August 29, 2005. In December, he acquires one new house (never previously placed in service) in the GO Zone, which he rents to a displaced business associate. Does he qualify for the 50 percent bonus depreciation? Is he engaged in an active trade or business?

A: Like the Liberty Zone bonus, the GO Zone bonus applies to nonresidential real property and residential rental property. One of the requirements to be GO Zone property is that the property is in the active conduct of a trade or business by the taxpayer in the GO Zone. This requirement is similar to the one in the Liberty Zone bonus. The Liberty Zone bonus regulations do not define “active conduct.”

With respect to rental real estate, the hurdle to get over is this active conduct requirement. There are two components to satisfy.

Trade or business – has the same meaning as in section 162 and the regulations there under, as provided in section 3.02(1) of Notice 2006-77.

Active conduct – where Congress intended to treat all real estate rental as a active conduct in a trade or business, Congress provided such a provision (e.g., see section 168(j)(5)). Because section 1400N(d) does not contain a provision similar to that in section 168(j)(5), some real estate rentals may not be in the active conduct of a trade or business for purposes of section 1400N(d). “Active conduct” is addressed in section 3.02(2) of Notice 2006-77, which provides that a taxpayer generally is considered to actively conduct a trade or business if the taxpayer meaningfully participates in the management or operations of the trade or business. Notice 2006-77 also provides several examples illustrating the “active conduct of a trade or business by the taxpayer in the GO Zone” requirement.

The same information would apply with respect to the May 4, 2007, Kansas storms and tornadoes, and the Midwestern disasters of 2008.

For more information on these disasters, see:

(03/09) Q: The special legislation drafted in response to Hurricane Katrina, the May 4, 2007, Kansas storm and tornadoes, and the Midwestern disasters of 2008 allow for bonus depreciation on real property, both residential and non-residential. If the property is later sold for a gain, is the gain attributable to the bonus depreciation ordinary income or section 1250 gain?

A: With respect to the character of the gain when the real property is sold, there are two aspects: section 1250 treatment and the GO Zone bonus depreciation recapture provision.

With respect to section 1250 treatment, GO Zone bonus depreciation is similar to bonus depreciation under section 168(k) and New York Liberty Zone bonus depreciation under section 1400L(b). The regulations under these two Code sections provide that bonus depreciation is not a straight line method for purposes of section 1250(b) and the regulations there under. See sections 1.168(k)-1(f)(3) and 1.1400L(b)-1(f)(3). The same treatment should apply to GO Zone bonus depreciation. Consequently, the GO Zone bonus depreciation is not a straight line method for purposes of section 1250 and, therefore, the excess of the depreciation claimed (including the GO Zone bonus depreciation) over the depreciation that would have resulted if depreciation had been determined under the straight line method, is subject to recapture under section 1250, which is ordinary income treatment.

Unlike the bonus depreciation under section 168(k) and the New York Liberty Zone bonus depreciation under section 1400L(b), the GO Zone bonus depreciation provisions under section 1400N(d) include a recapture provision (section 1400N(d)(5)), which refers to the recapture rules under section 179(d)(10). The GO Zone bonus depreciation recapture provision is addressed in section 6 of Notice 2006-77.

The same information would apply with respect to the May 4, 2007, Kansas storms and tornadoes, and the Midwestern disasters of 2008.

For more information on these disasters, see:

(03/09) Q: The IRS has stated net lease property does not qualify for bonus depreciation since it does not meet the active trade or business requirement. Does the IRS have authority to amend the regulations on this subject?

A: The question involves the GO Zone bonus depreciation requirement under section 1400N(d)(2)(A)(ii), which provides that substantially all of the use of the property must be in the GO Zone and in the active conduct of a trade or business by the taxpayer in the GO Zone. Persons should refer to section 3.02 of Notice 2006-77, which defines “trade or business” and “active conduct.”

The same information would apply with respect to the May 4, 2007, Kansas storms and tornadoes, and the Midwestern disasters of 2008.

For more information on these disasters, see:

If the question is requesting that all real estate rentals be treated as in the active conduct of a trade or business in the GO Zone for purposes of the GO Zone bonus depreciation, a provision similar to that in section 168(j)(5) would be necessary. If this is the case, the matter must be addressed by legislation.

(03/09) Q: Concerning the Liberty Zone rules being applied for bonus depreciation, an issue is businesses in the GO Zone who place assets in service and the assets are used outside the GO Zone and the 80 mile distance specified in the Liberty Zone guidance. For example, a trucking or air freight business in the GO Zone that delivers all over the country. The GO Zone does not have the concentration of population that is in the New York City area. Businesses in the GO Zone perform services over a much broader area. Does the IRS have the authority to address this or is legislation required?

A: Again, the question involves the GO Zone bonus depreciation requirement under section 1400N (d)(2)(A)(ii), which provides that substantially all of the use of the property must be in the GO Zone and in the active conduct of a trade or business by the taxpayer in the GO Zone. This requirement is the same as the requirement in section 1400L (b)(2)(A)(ii) for the New York Liberty Zone bonus depreciation.

The regulations under section 1.1400L (b)-1(c)(3) for the Liberty Zone bonus depreciation define "substantially all" as meaning 80 percent or more. There is not any 80 mile requirement under the Liberty Zone bonus depreciation regulations. For GO Zone bonus depreciation, Congress did not define "substantially all" and the legislative history does not provide any guidance as to what Congress intended by "substantially all." The substantially all requirement in the GO Zone bonus depreciation is the same as the substantially all requirement in the Liberty Zone bonus depreciation. Thus, section 3.01 of Notice 2006-77 defines “substantially all” as meaning 80 percent or more during each taxable year for purposes of GO Zone bonus depreciation.

The same information would apply with respect to the May 4, 2007, Kansas storms and tornadoes, and the Midwestern disasters of 2008.

For more information on these disasters, see:

(03/09) Q: In the previous FAQs on the issue of leased property qualifying for the 50 percent depreciation and the issue of “active conduct of a trade or business,” the answers state the IRS is considering additional guidance under section 469 dealing with passive activities. In developing the rules in this area, is the IRS also considering the existing regulations under section 355 that define “active conduct of a trade or business” (Regs. Sect. 1.355-3)?

A: The IRS issued guidance in section 3.02 of Notice 2006-77 on "active conduct of a trade or business" for purposes of the GO Zone Bonus Depreciation. In developing this guidance, we considered the definition of "active conduct of a trade or business" in several Code sections, including section 355.

(03/09) Q: Questions have arisen concerning operations in Gulf waters such as helicopters, barges, platforms, pipelines, etc. Would this be considered GO Zone for purposes of the bonus depreciation? These would be outside the boundaries of the parishes listed in the Act but the work would originate in the parish.

A: Only qualified Gulf Opportunity property (GO Zone property) is eligible for bonus depreciation. One of the requirements to be GO Zone property is that ‘substantially all’ of the use of the property must be in the GO Zone. If greater than 20 percent of the use of the property is outside the counties and parishes designated as being part of the GO Zone or is not in the active conduct of a trade or business by the taxpayer in the GO Zone, the property is not GO Zone property and is not eligible for the bonus depreciation.

The same information would apply with respect to the May 4, 2007, Kansas storms and tornadoes, and the Midwestern disasters of 2008.

For more information on these disasters, see:

(03/09) Q: On the definition of “substantially all” for purposes of GO Zone bonus depreciation, can the IRS take into consideration where the profits go within the GO Zone versus where the asset operates?

A: The statute provides that substantially all of the use of the property must be in the GO Zone. Use of the property refers to where the property is located/operated. To consider "use" to mean where the profits go would appear to require legislation.


Rate the Small Business and Self-Employed Website

Page Last Reviewed or Updated: 29-Sep-2014