Capitol Tax Partners Seeks Extension of Bonus Depreciation Service Date in Light of Hurricanes

From: Joe Mikrut [mikrut@capitoltax.com]

As I mentioned in our phone conversation, Eric thought it may be useful if I gave you some thoughts on the potential exercise of Treasury authority to extend the bonus depreciation paced-in-service date with respect to the Katrina, Rita and Wilma disaster zones, as permitted in the recently enacted Gulf Opportunity Zone Act of 2005, H.R. 4440.

By way of background, you will recall, in 2003 Congress extended and increased bonus depreciation under section 168(k) for certain qualified investments made before December 31, 2004. In the case of property that has a longer production period, present law provides that a taxpayer is eligible for bonus depreciation with respect to its investment in such property as of December 31, 2004, so long as the project is placed in service on or before December 31, 2005. A similar extended place-in-service date is provided for transportation property under the 2003 rules.

Due to extensive hurricane damage storm damage and complicated recovery efforts, taxpayers with construction projects that Congress had intended to qualify for bonus depreciation under the 2003 Act found themselves in a race to meet the statutory deadline of January 1, 2006.

To address this situation, section 105 of H.R. 4440, provides authority to the Secretary of Treasury to extend for up to one year, on a taxpayer-by-taxpayer basis, the December 31, 2005 placed-in-service date, to the extent the taxpayer can show it was affected by Hurricane Katrina, Rita or Wilma.

Requiring case-by-case determinations will, in most instances, put undue burdens on the government and taxpayers. Requiring taxpayers that missed the original 12/31/05 deadline because of the hurricanes to prove the same (and for the government to review the claims) seems needless. The fact that they missed the deadline and the partially completed property is physically located in one of the disaster zones that were carefully drawn by the Administration and the Congress should be enough, particularly given the nature of the projects.

Thus, I would recommend that in the case of property described in both Code section 168(k)(2)(B) (i.e., longer production period property) and section 105(1)(A) of H.R. 4440 (i.e., property to be placed in service in one of the three hurricane zones as defined by the Act), published guidance should provide an automatic extension of the placed-in-service date (for a period of at least 6 months).

There is little game playing that will result of providing this limited automatic extension. The amount of bonus deprecation that taxpayers in these cases are otherwise entitled to was locked-in as of 12/31/04. No more can be gained by the extension. In addition, to put themselves in a position where they were almost finished, taxpayers must have already committed a significant amount of capital to these projects. Allowing a relatively short automatic extension (say, 6 months) will eliminate projects that could not be completed because on non-hurricane factors.

I do not express any opinions as to the treatment of other property described in Act section 105 or those that may need a longer extension of time, because I am personally unaware of any of these factual situations. Consideration of an automatic extension for everyone covered by section 105 or for a full year may be warranted.

Thank you for your consideration of this matter. I would also suggest that you consider waiving estimated tax penalties for taxpayers that qualify for the extension to the extent the taxpayers planned on claiming the bonus depreciation for 2005 but must now wait until 2006.

FYI, I will be out of the office tomorrow thru 1/2. However, I will check my e-mails and voice mails (although blackberry service where I will be 12/23 thru 12/29 will be spotty) and will be available to discuss this issue at any time. Do not hesitate to contact me. My cell phone number is listed below.

In the meantime, have a happy and safe holiday.