Tax Administration: Information Is Not Available to Determine
Whether $5 Billion in Liberty Zone Tax Benefits Will Be Realized
(30-SEP-03, GAO-03-1102).
The President pledged a minimum of $20 billion in assistance to
New York for response and recovery efforts after the September
11, 2001, terrorist attacks. This includes tax benefits, commonly
referred to as the Liberty Zone tax benefits, that the Joint
Committee on Taxation (JCT) estimated would reduce federal tax
revenues by about $5 billion. The actual amount of benefits
realized, however, will depend on the extent to which taxpayers
and the city and state of New York take advantage of them. GAO
was asked to determine (1) the extent to which the Internal
Revenue Service (IRS) is collecting and reporting information
about the number of taxpayers using each of the seven Liberty
Zone tax benefits and the revenue loss associated with those
benefits and (2) if IRS is not collecting and reporting this
information, what steps it would need to take and what resources
would be needed to do so.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-1102
ACCNO: A08580
TITLE: Tax Administration: Information Is Not Available to
Determine Whether $5 Billion in Liberty Zone Tax Benefits Will Be
Realized
DATE: 09/30/2003
SUBJECT: Data collection
Disaster relief aid
Federal taxes
Losses
Tax administration
Tax credit
IRS New York Liberty Zone Tax Benefits
Program
New York (NY)
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GAO-03-1102
United States General Accounting Office
GAO
Report to Congressional Requesters
September 2003
TAX ADMINISTRATION
Information Is Not Available to Determine Whether $5 Billion in Liberty Zone Tax
Benefits Will Be Realized
GAO-03-1102
Highlights of GAO-03-1102, a report to the Honorable Charles B. Rangel,
Ranking Minority Member, Committee on Ways and Means, House of
Representatives, and the Honorable Carolyn B. Maloney, House of
Representatives
The President pledged a minimum of $20 billion in assistance to New York
for response and recovery efforts after the September 11, 2001, terrorist
attacks. This includes tax benefits, commonly referred to as the Liberty
Zone tax benefits, that the Joint Committee on Taxation (JCT) estimated
would reduce federal tax revenues by about $5 billion. The actual amount
of benefits realized, however, will depend on the extent to which
taxpayers and the city and state of New York take advantage of them.
GAO was asked to determine
o the extent to which the Internal Revenue Service (IRS) is collecting
and reporting information about the number of taxpayers using each of the
seven Liberty Zone tax benefits and the revenue loss associated with those
benefits and
o if IRS is not collecting and reporting this information, what steps it
would need to take and what resources would be needed to do so.
GAO is making no recommendations in this report. The Commissioner of
Internal Revenue was provided a draft of this report for his review and
comment. The IRS Director of Tax Administration Coordination agreed with
the contents of the report.
www.gao.gov/cgi-bin/getrpt?GAO-03-1102.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Michael Brostek at (202)
512-9110 or brostekm@gao.gov.
September 2003
TAX ADMINISTRATION
Information Is Not Available to Determine Whether $5 Billion in Liberty Zone Tax
Benefits Will Be Realized
For one of the seven Liberty Zone tax benefits, the business employee
credit, IRS is collecting but not planning to report some information
about use-the number of taxpayers claiming the credit and the amount of
credit claimed- nor is it planning to use this information to report the
revenue loss associated with that benefit. IRS is not planning to collect
or report information about the use of the other six benefits or the
revenue loss associated with those benefits. According to IRS officials,
the agency followed its usual procedures in determining whether to collect
information about benefit use and revenue loss. IRS officials said they
would collect and report these data if (1) it would help the agency
administer the tax laws or (2) IRS was legislatively mandated to do so.
IRS would need to make several changes if it were to collect more
information on the use of the benefits and the associated revenue loss,
and this information would not be complete or lead to a verifiable measure
of the reduction in federal tax revenues due to the benefits. IRS would
need to change forms, processing procedures, and computer programming,
which would add to taxpayer burden and IRS's workload. IRS officials were
unable to estimate the costs involved in accomplishing these actions or
the number of staff needed to do so. The officials said that the earliest
they could make these changes would be for tax year 2004 returns. As a
result, IRS would not have information for two of the years that the
benefits were in effect, which is significant because most of the benefits
expire by the end of 2006. In addition, if IRS were to collect data on the
use of the Liberty Zone benefits, it would be able to make an estimate,
but could not produce a verifiable measure, of the revenue loss due to the
benefits because, for example, IRS would have to make assumptions about
how taxpayers would have behaved in the absence of the benefits.
New York Liberty Zone
Contents
Letter 1
Results in Brief 2
Background 3
IRS Generally Not Planning to Collect or Report Information
about
the Use of Liberty Zone Tax Benefits or Reductions in
Taxpayers' Tax Liabilities 4
Several Changes Needed If IRS Were to Collect and Report
More
Information about the Liberty Zone Tax Benefits and Estimate
Revenue Losses 6
Agency Comments 9
Appendix I Objectives, Scope, and Methodology
Appendix II Summary of the Liberty Zone Tax Benefits
Table
Table 1: Example of Recalculation of Taxable Income
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separately.
United States General Accounting Office Washington, DC 20548
September 30, 2003
The Honorable Charles B. Rangel Ranking Minority Member Committee on Ways
and Means House of Representatives
The Honorable Carolyn B. Maloney House of Representatives
The President pledged a minimum of $20 billion in assistance to New York
for response and recovery efforts after the terrorist attacks of September
11, 2001. The $20 billion includes about $15 billion of congressionally
appropriated funds, primarily administered by the Department of Housing
and Urban Development, Department of Transportation, and Federal Emergency
Management Agency (FEMA), for different types of assistance.1 The
remaining assistance came in the form of tax benefits, which the Joint
Committee on Taxation (JCT) estimated would reduce federal revenues by
about $5 billion. These tax benefits are commonly referred to as the
Liberty Zone tax benefits.2 Because of your interest in whether the $5
billion in tax benefits will be realized, you asked us to determine the
extent to which the Internal Revenue Service (IRS) is collecting and
reporting information about the number of taxpayers using each of the
seven Liberty Zone tax benefits and the revenue loss associated with those
benefits. In addition, if IRS is not collecting and reporting this
information, you asked us to determine what steps it would need to take
and what resources would be needed to do so.
To address these objectives, we interviewed IRS and city and state of New
York officials and analyzed information they provided, as well as JCT
data, about the use and revenue effects of the Liberty Zone tax benefits.
We also discussed the steps IRS would need to take to collect information
on the
1 In March 2003, FEMA became a part of the Department of Homeland
Security. Also, a small portion of the funds are administered by other
agencies such as the Small Business Administration and the Department of
Labor. We will report additional information about the total benefits
provided to New York later this year.
2 The New York Liberty Zone is the area located 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.
Results in Brief
use and revenue effects of the benefits and the resources it would need to
do so. For the purposes of this report, we defined use as the number of
taxpayers who claimed each benefit and the amount each claimed. However,
the amount that taxpayers claim on their returns is not the same as the
reduction in tax liabilities due to using the benefits. Because some of
the Liberty Zone tax benefits substitute for less generous deductions or
credits to which taxpayers would otherwise be entitled, the net reduction
in taxpayers' tax liabilities (and net reduction in federal revenues) can
only be determined by comparing taxpayers' tax liabilities with the
benefits in place to their tax liabilities when only the alternate
deductions and credits are available.3 Our scope and methodology are
discussed in greater detail in appendix I.
For one of the seven Liberty Zone tax benefits, the business employee
credit, IRS is collecting but not planning to report some information
about use-the number of taxpayers claiming the credit and the amount of
credit claimed-nor is it planning to use this information to report on the
revenue loss associated with that benefit. IRS is not planning to collect
or report information about the use of the other six benefits or the
revenue loss associated with those benefits. IRS can collect information
on the use of the business employee credit because it developed a new form
to administer this credit. However, IRS currently cannot collect
information on the remaining six Liberty Zone benefits because it is using
existing forms to administer them, and taxpayers do not report these six
benefits as separate items on their returns. According to IRS officials,
the agency followed its usual procedures in determining whether to collect
information about benefit use and revenue loss. IRS officials said they
would collect and report these data if (1) it would help the agency
administer the tax laws or (2) IRS was legislatively mandated to do so.
IRS would need to make several changes if it were to collect more
information on the use of the benefits and the associated revenue loss,
and this information would not be complete or lead to a verifiable measure
of the reduction in federal tax revenues due to the benefits. IRS would
need to change forms, processing procedures, and computer programming,
3 JCT's $5 billion estimate of the reduction in federal tax revenues is
not exactly the same as the economic value of the benefits to taxpayers.
For example, the JCT estimate, which covers a 10-year time frame, does not
completely reflect the fact that taxpayers who claim the expensing
deduction today would receive smaller deductions in the future than they
otherwise could have claimed.
which would add to taxpayer burden and IRS's workload. For example,
changing the form that taxpayers use to claim depreciation so that they
report separately the amount of depreciation due to the special Liberty
Zone depreciation allowance would result in increased taxpayer burden.
IRS's workload would also increase because, among other things, it would
be processing additional information on depreciation. IRS officials were
unable to estimate the costs involved in accomplishing these actions or
the number of staff needed to do so. They said that the earliest they
could make these changes would be for tax year 2004 returns. As a result,
IRS would not have information for two of the years that the benefits were
in effect, which is significant because most of the benefits expire by the
end of 2006. In addition, if IRS were to collect data on the use of the
Liberty Zone benefits, it would be able to make an estimate, but could not
produce a verifiable measure, of the revenue loss due to the benefits
because, for example, IRS would have to make assumptions about how
taxpayers would have behaved in the absence of the benefits.
The Commissioner of Internal Revenue was provided a draft of this report
for his review and comment. The IRS Director of Tax Administration
Coordination agreed with the contents of the report.
To assist New York in recovering from the September 11, 2001, terrorist
attacks, Congress passed Public Law 107-147, the Job Creation and Worker
Assistance Act of 2002. The act was signed into law on March 9, 2002, and
created seven tax benefits that focus on the New York Liberty Zone. The
Liberty Zone tax benefits include
o treating employees in the Liberty Zone as a targeted group for
purposes of the work opportunity tax credit (WOTC), which IRS refers to as
the business employee credit;
o a special depreciation allowance;
o an increase in section 179 expensing;
o special treatment of leasehold improvement property;
o an extension of the replacement period for involuntarily converted
property;
o authority to issue tax-exempt private activity bonds; and
o authority to issue advance refunding bonds.
An explanation of each benefit, an example of how it can be used, and the
period each benefit is in effect are included in appendix II.
Background
IRS Generally Not Planning to Collect or Report Information about the Use of
Liberty Zone Tax Benefits or Reductions in Taxpayers' Tax Liabilities
Under the Congressional Budget Act of 1974 as amended, JCT provides
estimates of the revenue consequences of tax legislation. In March 2002,
JCT estimated that the New York Liberty Zone tax benefits would reduce
federal revenues by $5.029 billion over the period 2002 through 2012.4
For one of the seven Liberty Zone tax benefits, the business employee
credit, IRS is collecting but not planning to report some information
about use-the number of taxpayers claiming the credit and the amount of
credit claimed-nor is it planning to use this information to report on how
the benefit has reduced taxpayers' tax liabilities. IRS is not planning to
collect or report information about the use of the other six benefits or
how using these benefits has reduced taxpayers' tax liabilities.
IRS collects information on how many taxpayers use the business employee
credit and the amount of the credit claimed on Form 8884 (New York Liberty
Zone Business Employee Credit). Submission processing officials in the
Small Business/Self-Employed (SB/SE) Division began entering information
from this form into IRS's computer system in January 2003. Some taxpayers
claiming the business employee credit may have their returns processed by
the Wage and Investment (W&I) Division, which is not planning to enter
information from the form into the computer system. However, IRS officials
said that the bulk of the taxpayers who would claim this credit would
submit their returns to the SB/SE Division.
IRS can collect information on the use of the business employee credit
because it developed a new form to administer this credit. Although the
business employee credit was included in the WOTC provisions, IRS
officials said they needed to track business employee credits separately
because the business employee credit can be used to offset any alternative
minimum taxes owed but the general WOTC provisions cannot.5 IRS currently
cannot collect information on the remaining six Liberty Zone benefits
because it is using existing forms to administer them, and
4 Joint Committee on Taxation, Estimated Revenue Effects of the "Job
Creation and Worker Assistance Act of 2002" Fiscal Years 2002-2012
(Washington, D.C.: Mar. 6, 2002),
2.
5 The alternative minimum tax is a separate tax computation required of
some taxpayers whose taxable incomes exceed certain thresholds and who
otherwise would owe little or no taxes because they are claiming certain
special deductions and credits.
taxpayers do not report these six benefits as separate items on their
returns. For example, taxpayers add the amount of depreciation they are
allowed under the Liberty Zone special depreciation allowance benefit to
other depreciation expenses and report their total depreciation expenses
on their returns. Since taxpayers do not report their use of six of the
seven benefits separately on their returns, IRS cannot report on how
extensively these six benefits were used.
IRS officials said that although they are collecting information on the
amount of business employee credits claimed by taxpayers, they are not
planning on reporting information on the extent to which the benefit
reduced taxpayers' tax liabilities. For the other six benefits, IRS
officials said that without information about use, they cannot collect or
report on the extent to which the benefits reduced taxpayers' tax
liabilities.6
According to IRS officials, the agency followed its usual procedures in
determining the type of information to collect about the Liberty Zone tax
benefits. They added that IRS would collect and report information that
would help it to administer the tax laws or if it was legislatively
mandated to collect or report information. IRS officials said they do not
need information about the use of the Liberty Zone tax benefits or the
resulting reductions in taxpayers' tax liabilities in order to administer
the tax laws. For example, IRS officials said that they do not need
information on each specific benefit claimed to properly target their
enforcement efforts. Instead, they target their enforcement efforts based
on taxpayers claiming various credits, deductions, and so forth that fall
outside of expected amounts. In addition, IRS officials noted that the
agency has not been legislatively mandated to collect or report
information on the benefits.
6 Bond issuers also receive economic benefits from tax-exempt bonds
because they pay less interest than they would have had to pay on the same
amount of bonds that were not tax exempt. IRS could use forms prepared by
bond issuers to collect information about the two Liberty Zone bond
benefits, such as the maturity date and issue prices. Information on the
bonds issued is also available from the city and state of New York.
Several Changes Needed If IRS Were to Collect and Report More Information
about the Liberty Zone Tax Benefits and Estimate Revenue Losses
IRS would need to make several changes if it were to collect more
information on taxpayers' use of the benefits and their effect on reducing
taxpayers' tax liabilities. IRS would need to change forms used to collect
information from taxpayers, change how it processes information from tax
returns, and revise computer programming, which would add to taxpayer
burden and IRS's workload. Even if it were to make these changes, IRS
would not have information for two of the years the benefits were
available. Also, although the additional information would enable IRS to
make an estimate of the revenue loss due to the benefits, it would not be
able to produce a verifiable measure of the loss. To produce the estimate,
IRS would have to make assumptions about how taxpayers would have behaved
in the absence of the benefits.
Several Changes Needed If IRS Were to Report on Use of Benefits and
Reduction in Taxpayers' Tax Liabilities
For six of seven of the Liberty Zone tax benefits, IRS would need to
revise forms, tax return processing procedures, and computer programming
if it were to collect and report information about the number of taxpayers
claiming the benefit and the amount they claimed. It would also need to
take most of these steps to report on the use of the seventh benefit-the
business employee credit. According to IRS officials, they would need to
make staff available to revise forms, review returns for completeness and
accuracy, transcribe the additional data, and write the necessary computer
programs for entering and extracting data. They would also need to
allocate computer resources to process the additional information
collected and prepare reports on the use of the benefits. For example, for
the special depreciation allowance benefit, IRS would need to revise
o Form 4562 (Depreciation and Amortization) so that taxpayers reported
the amount of depreciation they claimed specifically due to this benefit,
o tax return processing procedures so that processing staff reviewed
Form 4562 for completeness and accuracy and transcribed information about
the special depreciation allowance, and
o computer programming so that information about the special
depreciation allowance could be entered into IRS's information systems and
extracted in order to prepare reports about the use of the benefit.
For the seventh benefit-the business employee credit-taxpayers already
separately report the amount of the credit they are claiming, and IRS is
already reviewing these forms for accuracy and completeness, transcribing
data from them, and entering this information into the agency's computer
system for those returns that are processed by the SB/SE Division.
However, computer programming would need to be changed to extract
information to prepare reports about benefit use. For
any returns processed by the W&I Division, IRS would also need to revise
W&I processing procedures and computer programming.
Since IRS currently does not have any plans to make these changes,
officials were unable to estimate the costs involved in accomplishing
these actions or the number of staff needed to do so. However, IRS
officials estimated they added one full-time equivalent (FTE) primarily to
review the Form 8884s for completeness and accuracy and for data
transcription-part of the process to collect information about the use of
the business employee credit.7
If IRS collected information about the use of the benefits, IRS could then
develop some information on the reduction in taxpayers' tax liabilities
due to the benefits. For example, IRS could determine how much lower each
taxpayers' tax liability is due to the use of the tax benefits, assuming
that taxpayer behavior would be the same whether the benefits existed or
not. Table 1 is an example of such a computation for claiming the Liberty
Zone Section 179 expensing benefit. In this example, a taxpayer with
$100,000 in income bought $40,000 worth of office equipment in 2002 and
placed this equipment in service in the Liberty Zone in 2002. After
applying the Liberty Zone section 179 expensing benefit, taxable income
would be $60,000. Since the equipment has been completely expensed, the
taxpayer cannot claim any further deductions for this equipment. To
recalculate the taxpayer's taxable income as if the special Liberty Zone
expensing benefit did not exist, IRS could assume that the taxpayer would
make the same investment, even without the Liberty Zone tax benefit, and
still claim the $24,000 section 179 deduction available to all taxpayers
in 2002 and any other available deductions, such as the special
depreciation allowance. In our example, the special depreciation allowance
would be worth $4,800, and the amount otherwise available as a
depreciation deduction (regular depreciation) would be worth $1,600, which
would reduce the taxpayer's taxable income to $69,600. The total reduction
in taxable income would be $9,600.
7 An FTE consists of one or more employees who collectively work for 1
year. For example, one full-time employee or two half-time employees equal
one FTE.
Table 1: Example of Recalculation of Taxable Income
Taxpayer calculation of Recalculation of taxable taxable income with
Liberty income with standard Zone expensing benefit
deductions
Income $100,000 Income $100,000 Less: Less: Liberty Zone Section 179
(40,000) Standard Section 179 (24,000) Special depreciation (4,800)
Regular depreciation (1,600)
Taxable income $60,000 Taxable income $69,600
Sources: IRS and GAO.
Note: GAO analysis of IRS information.
Once all the adjustments to taxable income were made, IRS would then need
to apply the appropriate marginal tax rate to arrive at the taxpayer's
recalculated tax liability.
IRS Could Produce Estimates but Not a Verifiable Measure of the Revenue Loss
If IRS were to begin collecting information on the number of taxpayers
using the Liberty Zone tax benefits and the amounts they claimed, the
information would not be complete. In addition, although the information
would enable IRS to make an estimate of the revenue loss due to the
benefits, the information would not result in a verifiable measure of the
loss. To produce the estimate, IRS would have to make assumptions about
how taxpayers would have behaved in the absence of the benefits.
IRS said the earliest it would be able to collect information on the
number of taxpayers using the benefits and the amounts each claimed would
be for tax year 2004 returns, which IRS would not process until calendar
year 2005. As a result, IRS would not have information for two of the
years that the benefits were in effect, which is significant because most
of the benefits expire by the end of 2006.8 IRS could not reconstruct
information on tax liability for those 2 years because returns already
filed would not indicate whether taxpayers used the Liberty Zone benefits
and would not show the amount claimed through benefit use. Although IRS
could ask for information about past benefit use since taxpayers are
instructed to keep tax records for 3 years, this would require taxpayers
to provide additional information and increase taxpayer burden. Also, it
would be difficult for
8 Details on the expiration dates for each benefit are given in app. II.
IRS to use current year information to estimate the amount claimed through
benefit use retroactively because the pattern of using the benefits could
have changed over time.
In addition to not being complete, the data that IRS could collect on the
number of taxpayers using the Liberty Zone benefits and the amounts each
claimed would not be sufficient for actually measuring how much revenue
those benefits cost the federal government. The reduction in revenues due
to the Liberty Zone tax benefits is equal to the difference between the
amount of revenue that the federal government would collect with the
benefits in place and the amount it would collect in the absence of those
benefits. There are two reasons why revenues would be different with and
without the benefits. First, the rules for computing tax liabilities are
different in the two cases (as shown in table 1). Second, the behavior of
many taxpayers is likely to be different in the two cases. In fact, a
primary
purpose of the tax benefits is to influence taxpayer behavior. For
example,
in the case of the Liberty Zone section 179 benefit, some taxpayers who
claim this benefit would have made different investment decisions if that
particular benefit were not available. In our simplified example shown in
table 1, this difference in behavior might be that the taxpayer invested
less
than $40,000 in office equipment-perhaps even nothing-because the
Liberty Zone benefit did not exist. As a consequence, the taxpayer's
taxable income would have been different than the $69,600 shown in table
1. Given that IRS cannot know what taxpayers would have done in the
absence of the benefits, the best it could do is estimate revenue losses
based on assumptions about that alternative behavior.
Agency Comments The Commissioner of Internal Revenue was provided a draft
of this report for his review and comment. The IRS Director of Tax
Administration Coordination agreed with the contents of the report.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 7 days from
its date. At that time, we will send copies to the Chairman and Ranking
Minority Member of the Senate Committee on Finance; the Chairman of the
House Committee on Ways and Means and the Chairman and Ranking Minority
Member of its Subcommittee on Oversight; the Secretary of the Treasury;
the Commissioner of Internal Revenue; the Director of the Office of
Management and Budget; and other interested parties. We will make copies
available to others on request. In addition, the report will be available
at no charge on the GAO Web site at http://www.gao.gov.
This report was prepared under the direction of Jonda Van Pelt, Assistant
Director. If you have any questions regarding this report, please contact
her at (415) 904-2186 or vanpeltj@gao.gov or me at (202) 512-9110 or
brostekm@gao.gov. Key contributors to this report were Evan Gilman, Edward
Nannenhorn, Lynne Schoenauer, Shellee Soliday, Anne Stevens, and James
Wozny.
Michael Brostek Director, Tax Issues
Appendix I: Objectives, Scope, and Methodology
Our first objective was to determine the extent to which the Internal
Revenue Service (IRS) is collecting and reporting information about the
use and value of the seven Liberty Zone tax benefits. We defined use as
the number of taxpayers who claimed each benefit and the amount each
claimed. In analyzing value, we examined what information IRS could
provide about reductions in taxpayers' tax liabilities when they used the
Liberty Zone tax benefits, and then examined whether this information
could be used to measure the actual reduction in federal tax revenues. To
address the first objective, we interviewed IRS officials from Legal
Counsel, the Wage and Investment (W&I) Division's and the Small
Business/Self-Employed (SB/SE) Division's submission processing groups,
Statistics of Income (SOI), Forms and Publications, and the Tax Exempt
Government Entities (TEGE) Division to determine if they were collecting
and reporting any information about the use of the Liberty Zone tax
benefits and how the benefits reduced taxpayers' tax liabilities. We
analyzed the documents they provided about collecting and reporting on the
use of the benefits and the reduction in taxpayers' tax liabilities. We
also analyzed the data the Joint Committee on Taxation (JCT) provided
about its estimate of the reduction in federal tax revenues. Finally, we
interviewed New York city and state officials to determine if they were
collecting and reporting information on the benefits.
Our second objective was to determine what steps IRS would need to take
and the resources it would need to collect and report information on the
use and value of the Liberty Zone tax benefits if it is not already doing
so. We used the same definition of use and value as we used for the first
objective. To address the second objective, we interviewed IRS officials
from Legal Counsel, the W&I Division's and the SB/SE Division's submission
processing groups, SOI, Forms and Publications, and the TEGE Division to
determine what steps they would need to take and the resources they would
need to collect and report information on the use of the Liberty Zone tax
benefits and the reduction in taxpayers' tax liabilities if they used the
benefits. We also analyzed IRS documents related to the steps that would
need to be taken to collect and report on the use of the benefits and on
the reduction in taxpayers' tax liabilities.
We performed our work from April 2003 through August 2003 in accordance
with generally accepted government auditing standards.
Appendix II: Summary of the Liberty Zone Tax Benefits
Liberty Zone
tax benefita Benefit summary Example of the benefit Effective dates
Business The work opportunity tax credit (WOTC) was expanded to An
employee works at a Wages paid or incurred
employee credit include a new targeted group for employees who perform
small company located in for qualified employees substantially all their
services for a business in the Liberty the Liberty Zone from during
calendar years Zone or for a business that relocated from the Liberty Zone
June 1, 2002, to October 31, 2002 and 2003 elsewhere within New York City
due to the physical 2002, and receives $3,000 destruction or damage of
their workplaces by the in wages a month. The September 11, 2001,
terrorist attacks. company can claim a credit
The New York Liberty Zone business employee credit for 40 percent of the
first
allows eligible businesses with an average of 200 or fewer $6,000 in wages
paid
employees to take a maximum credit of 40 percent of the ($2,400).
first $6,000 in wages paid or incurred for work performed by
each qualified employee during calendar years 2002 and
2003. Unlike the other targeted groups under WOTC, the
credit for the new group is available for wages paid to both
new hires and existing employees.
Special The special depreciation allowance provides an additional
depreciation deduction for eligible properties. Eligible Liberty Zone
allowance properties include new tangible property (e.g., new office
equipment), used tangible property (e.g., used office equipment), and
residential rental property (e.g., an apartment complex) and
nonresidential real property (e.g., an office building) if it
rehabilitates real property damaged or replaces real property destroyed or
condemned as a result of the September 11, 2001, terrorist attacks.
For property inside the Liberty Zone, the special depreciation allowance
allows taxpayers to deduct 30 percent of the adjusted basis of qualified
property acquired by purchase after September 10, 2001, and placed in
service on or before December 31, 2006 (December 31, 2009, in the case of
nonresidential real property and residential rental property). For
property outside the Liberty Zone, a special depreciation allowance is
available for taxpayers but only with regard to qualified property-such as
new tangible property and non-Liberty Zone leasehold improvement
property-that is acquired after September 10, 2001, and before September
11, 2004, and is placed in service on or before December 31, 2004.
However, recent legislation (the Jobs and Growth Tax Relief Reconciliation
Act of 2003, Pub. L. No. 108-27) has increased the deduction to 50 percent
for qualified property both within and outside the Liberty Zone that is
acquired after May 5, 2003, and placed in service on or before December
31, 2004.
On December 1, 2002, a real estate development firm purchases an office
building in the New York Liberty Zone that costs $10 million and places it
in service on June 1, 2003. The building replaces real property damaged as
a result of the September 11, 2001, terrorist attacks. Under the
provision, the taxpayer is allowed an additional first-year depreciation
deduction of 30 percent ($3 million).
Residential rental property and nonresidential real property: Acquired by
purchase after September 10, 2001, and placed in service on or before
December 31, 2009
New and used tangible property: Acquired by purchase after September 10,
2001, and placed in service on or before December 31, 2006
Appendix II: Summary of the Liberty Zone Tax Benefits
Liberty Zone
tax benefita Benefit summary Example of the benefit Effective dates
Section 179 expensing Taxpayers with a sufficiently small investment in
qualified section 179 business property in the Liberty Zone can elect to
deduct rather than capitalize the amount of their investment and are
eligible for an increased amount over other taxpayers. For qualified
Liberty Zone property placed in service during 2001 and 2002, under
section 179 taxpayers could deduct up to $59,000 ($24,000 under the
general provision plus an additional $35,000) of the cost. The investment
limit (phase-out range) in the property was $200,000. For qualified
Liberty Zone property placed in service after 2002 and before 2007,
taxpayers could deduct $60,000 ($25,000 under the general provision plus
the additional $35,000) of the cost.
However, recent legislation (Pub. L. No. 108-27) has further increased the
maximum deduction for qualified Liberty Zone property placed in service
after 2002 and before 2006 to $135,000 and has increased the investment
limit to $400,000. For 2006, the maximum section 179 deduction allowed for
qualified Liberty Zone property returns to $60,000 and the investment
limit is $200,000. To calculate the available expensing treatment
deduction amount for qualified Liberty Zone property, every dollar for
which 50 percent of the cost of the property exceeds the investment limit
is subtracted from the maximum deduction allowed.
Taxpayers outside of the Liberty Zone may also expense qualified property
under section 179. However, the maximum deduction for non-Liberty Zone
property is $35,000 less than the maximum deduction allowed for Liberty
Zone property. The investment limits for Liberty Zone and non-Liberty Zone
property are similar. However, in contrast, in calculating the available
expensing treatment deduction amount for non-Liberty Zone properties,
every dollar invested in the property that exceeds the investment limit is
subtracted from the maximum deduction allowed.
In 2002, a taxpayer purchases and places in service in his or her Liberty
Zone business several qualified items of equipment costing a total of
$260,000. Because 50 percent of the cost of the property ($130,000) is
less than $200,000, the investment limit, the section 179 deduction of
$59,000 is not reduced, and the taxpayer can deduct this amount.
Effective for section 179 property placed in service after September 10,
2001, and on or before December 31, 2006
Appendix II: Summary of the Liberty Zone Tax Benefits
Liberty Zone
tax benefita Benefit summary Example of the benefit Effective dates
Leasehold Qualified Liberty Zone leasehold improvement property can In
2004, a taxpayer buys Effective for property improvement be depreciated
over a 5-year period using the straight-line and places in service placed
in service after property method of depreciation. The term "qualified
Liberty Zone $100,000 in additional walls September 10, 2001,
leasehold property" means property as defined in section for a leased
office building in and on or before
168(k)(3) and may include items such as additional walls the Liberty Zone.
For each December 31, 2006
and plumbing and electrical improvements made to an tax year from 2004
through
interior portion of a building that is nonresidential real 2008, the
taxpayer can
property. Qualified Liberty Zone leasehold improvements deduct up to
one-fifth of the
must be placed in service in a nonresidential building that is cost of the
property.
located in the Liberty Zone after September 10, 2001, and
on or before December 31, 2006. The class life for qualified
New York Liberty Zone leasehold improvement property is 9
years for purposes of the alternative depreciation system.
Taxpayers can also depreciate leasehold improvements
outside of the Liberty Zone. These taxpayers can
depreciate an addition or improvement to leased
nonresidential real property using the straight-line method
of depreciation over 39 years. Qualified leasehold
improvement properties outside the Liberty Zone can qualify
for both the 39-year depreciation deduction and the special
depreciation allowance. However, leasehold improvements
inside the Liberty Zone do not qualify for the special
depreciation allowance.
Replacement A taxpayer may elect not to recognize gain with respect to A
taxpayer held a truck for Effective for involuntary
period for property that is involuntarily converted if the taxpayer
productive use in a Liberty conversions in the
involuntarily acquires qualified replacement property within an applicable
Zone business, but it was Liberty Zone occurring
converted period. The replacement period for property that was destroyed
in the on or after
property involuntarily converted in the Liberty Zone as a result of the
September 11, 2001, September 11, 2001,
September 11, 2001, terrorist attacks is 5 years after the end of the
taxable year in which a gain is realized provided that substantially all
of the use of the replacement property is in New York City. The
involuntarily converted Liberty Zone property can be replaced with any
tangible property held for productive use in a trade or business because
taxpayers in presidentially declared disaster areas such as the Liberty
Zone can use any tangible, productive use property to replace property
that was involuntarily converted.
Outside of the Liberty Zone, the replacement period for involuntarily
converted property is 2 years (3 years if the converted property is real
property held for the productive use in a trade or business or for
investment), and the converted property must be replaced with replacement
property that is similar in service or use.
terrorist attacks. Several years ago, the taxpayer paid $50,000 for the
truck and, over time, depreciated the basis in the truck to $30,000. If
the insurance company paid $35,000 in reimbursement for the truck and the
taxpayer used the $35,000 to purchase replacement property of any type
that is held for productive use in a trade or business within 5 years
after the close of the tax year of payment by the insurance company, the
taxpayer would not recognize a gain.
as a result of the terrorist attacks on that date
Appendix II: Summary of the Liberty Zone Tax Benefits
Liberty Zone
tax benefita Benefit summary Example of the benefit Effective dates
Private activity An aggregate of $8 billion of tax-exempt private activity
The Mayor of New York City Effective for bonds
bonds bonds, called qualified New York Liberty bonds, are designates $120
million of issued after March 9, authorized to finance the acquisition,
construction, qualified New York Liberty 2002 (the date of reconstruction,
and renovation of certain property that is bonds to finance the enactment
of the Job primarily located in the Liberty Zone. Qualified New York
construction of an office Creation and Worker Liberty bonds must finance
nonresidential real property, building in the Liberty Zone. Assistance Act
of residential rental property, or public utility property and must 2002),
and on or before also satisfy certain other requirements. The Mayor of New
December 31, 2004 York City and the Governor of New York State may each
designate up to $4 billion in qualified New York Liberty bonds.
Advance An aggregate of $9 billion of advance refunding bonds may The
Governor of New York Effective for advance
refunding bonds be issued to pay principal, interest, or redemption price
on State designates $70 million refunding bonds issued certain prior
issues of bonds issued for facilities located in of advance refunding
bonds after March 9, 2002, New York City (and certain water facilities
located outside of to refinance bonds that and on or before New York
City). Under this benefit, certain qualified bonds, financed the
construction of December 31, 2004 which were outstanding on September 11,
2001, and had hospital facilities in New exhausted existing advance
refunding authority before York City. September 12, 2001, are eligible for
one additional advance refunding. The Mayor of New York City and the
Governor of New York State may each designate up to $4.5 billion in
advance refunding bonds.
Sources: Public Law 107-147, IRS, and GAO.
aThe Liberty Zone tax benefits were enacted as part of the Job Creation
and Worker Assistance Act of 2002, Pub. L. No. 107-147.
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