The Gulf Opportunity Zone Act of 2005 (“GO Zone”) created a number of business incentives to help Louisiana and the other areas impacted by Hurricane Katrina. One of the key elements of the GO Zone legislation is the 50 percent bonus depreciation provision. This provision has been getting a great deal of coverage in the media and among the various investment circles. However, until guidance is issued by the IRS, there are some areas of uncertainty in this legislation.
The bonus depreciation provision allows a taxpayer to depreciate 50 percent of the cost of certain qualified GO Zone property. Generally, qualified GO Zone property is property acquired by purchase after August 27, 2005, for original use by the taxpayer in the GO Zone in the active conduct of a trade or business. The primary area of uncertainty in this legislation is the definition of the word “active,” as used in the statute. With respect to an operating business acquiring qualified GO Zone property, the bonus depreciation provision should not create uncertainty. However, with respect to individuals looking to acquire property for leasing or other passive activities, then the meaning of the word “active” creates a great deal more uncertainty. It is likely that the intent behind the use of the word “active” is that any property which qualifies for bonus depreciation must actually be used in an ongoing trade or business in which the taxpayer is actively involved. Thus, for example, it is unlikely that a passive investor in real estate looking to build a building to lease out to tenants would qualify. Until the IRS issues guidance on this provision, taxpayers should exercise caution when acquiring property or undertaking projects with the expectation of benefiting from the 50 percent bonus depreciation.