Supplement to Publication 946 |
2001 Tax Year |
New York Liberty Zone Benefits
Several benefits are available for property you place in service in the New
York Liberty Zone (Liberty Zone). They include a special depreciation allowance
for the year you place the property in service, an increased section 179
deduction, and the classification of certain leasehold improvement property as 5-
year property.
Area defined. 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, New York.
Special Liberty Zone Depreciation Allowance
You can take a special depreciation allowance for
qualified Liberty Zone property you place in service after September 10, 2001.
The allowance is an additional deduction of 30% of the property's depreciable
basis. To figure the depreciable basis, you must first multiply the property's
cost or other basis by the percentage of business/investment use and then reduce
that amount by any section 179 deduction and certain other deductions and credits
for the property. See What Is the Basis for Depreciation? on page 23 in
Publication 946 for more information on figuring depreciable basis.
The allowance is deductible for both regular tax and alternative minimum tax
(AMT) purposes. There is no AMT adjustment required for any depreciation figured
on the remaining basis of the property. In the year you claim the allowance
(generally the year you place the property in service), you must reduce the
depreciable basis of the property by the allowance before figuring your regular
depreciation deduction.
You cannot claim the special Liberty Zone depreciation allowance for
property eligible for the special depreciation allowance explained earlier in
Qualified Property under Special Depreciation Allowance. Qualified
property is eligible for only one special depreciation allowance.
Example 1. On November 1, 2001, you bought and placed in service in your
business, which is in the Liberty Zone, qualified Liberty Zone property that cost
$200,000. You did not elect to claim a section 179 deduction. You can deduct 30%
of the cost ($60,000) as a special Liberty Zone depreciation allowance for 2001.
You use the remaining $140,000 of cost to figure your regular depreciation
deduction for 2001 and later years.
Example 2. The facts are the same as in Example 1, except
that you choose to deduct $59,000 of the property's cost as a section 179
deduction. (See Increased Section 179 Deduction, later, for information
concerning how this section 179 deduction amount is figured). You use the
remaining $141,000 of cost to figure your special Liberty Zone depreciation
allowance of $42,300 ($141,000 ?30%). You use the remaining $98,700 of cost to
figure your regular depreciation deduction for 2001 and later years.
Qualified Liberty Zone Property
For a 2001 calendar or fiscal year and a 2000 fiscal year that ends after
September 10, 2001, property qualifies for the special Liberty Zone depreciation
allowance if it meets the following requirements.
- It is one of the following types of property.
- Used property depreciated under MACRS with a recovery period of 20 years
or less. See Can You Use MACRS To Depreciate Your Property and
Which Recovery Period Applies? on pages 7 and 23, respectively, in
Publication 946.
- Used water utility property. See 25-year property on page 22 in
Publication 946.
- Used computer software that is not a section 197 intangible as described
in Computer software on page 5 in
Publication 946. (The cost of some
computer software is treated as part of the cost of hardware and is
depreciated under MACRS.)
- Certain nonresidential real property and residential rental property
(defined later).
- It meets the following tests (explained later under Tests to be met).
- Acquisition date test.
- Placed in service date test.
- Substantial use test.
- Original use test.
- It is not excepted property (explained later under Excepted property).
Nonresidential real property and residential rental property. This
property is qualifying property only to the extent it rehabilitates real property
damaged, or replaces real property destroyed or condemned, as a result of the
terrorist attack of September 11, 2001. Property is treated as replacing
destroyed or condemned property if, as part of an integrated plan, such property
replaces real property included in a continuous area that includes real property
destroyed or condemned.
For these purposes, real property is considered destroyed (or condemned) only
if an entire building or structure was destroyed (or condemned) as a result of
the terrorist attack. Otherwise, the property is considered damaged real
property. For example, if certain structural components of a building (such as
walls, floors, or plumbing fixtures) are damaged or destroyed as a result of the
terrorist attack, but the building is not destroyed (or condemned), then only
costs related to replacing the damaged or destroyed structural components qualify
for the special Liberty Zone depreciation allowance.
Tests to be met. To qualify for the special Liberty Zone depreciation
allowance, your property must meet all of the following tests.
Acquisition date test. You must have acquired the property by
purchase after September 10, 2001, and there must not have been a binding written
contract for the acquisition in effect before September 11, 2001.
For information on the acquisition of property by purchase, see Property
Acquired by Purchase on page 15 of
Publication 946.
Property you manufacture, construct, or produce for your own use meets this
test if you began the manufacture, construction, or production of the property
after September 10, 2001.
Placed in service date test. Generally, the property must be
placed in service for use in your trade or business or for the production of
income before January 1, 2007 (January 1, 2010, in the case of qualifying
nonresidential real property and residential rental property).
If you sold property you placed in service after September 10, 2001, and you
leased it back within 3 months after the property was originally placed in
service, the property is treated as placed in service no earlier than the date it
is used under the leaseback.
Substantial use test. Substantially all use of the property must
be in the Liberty Zone and in the active conduct of your trade or business in the
Liberty Zone.
Original use test. The original use of the property in the
Liberty Zone must have begun with you after September 10, 2001.
Used property can be qualified Liberty Zone property if it has not previously
been used within the Liberty Zone. Also, additional capital expenditures you
incurred after September 10, 2001, to recondition or rebuild your property meet
the original use test if the original use of the property in the Liberty Zone
began with you.
Excepted property. The following property does not qualify for the
special Liberty Zone depreciation allowance.
- Property eligible for the special depreciation allowance explained earlier
in Qualified Property under Special Depreciation Allowance.
- Property required to be depreciated using ADS. This includes listed
property used 50% or less in a qualified business use.
- Qualified New York Liberty Zone leasehold improvement property (defined
earlier in Excepted Property under Special Depreciation
Allowance).
Example. In December 2001, you bought and placed in service in
your business in the Liberty Zone the following property.
- New office furniture with a MACRS recovery period of 7 years.
- A used computer with a MACRS recovery period of 5 years.
The computer had not previously been used within the Liberty Zone.
Because the office furniture is new property, it qualifies for the special
depreciation allowance, but not the special Liberty Zone depreciation allowance.
Because the computer is used property that had not previously been used in the
Liberty Zone, it qualifies for the special Liberty Zone depreciation allowance,
but not the special depreciation allowance.
Election Not To Claim the Liberty Zone Allowance
You can elect not to claim the special Liberty Zone depreciation
allowance for qualified property. If you make this election for any property, it
applies to all property in the same property class placed in service during the
year. To make this election, attach a statement to your return indicating you
elect not to claim the allowance and the class of property for which you are
making the election.
When to make the election. Generally, you must make the election on a
timely filed tax return (including extensions) for the year in which you place
the property in service.
However, if you timely filed your return for the year without making the
election, you can still make the election by filing an amended return within 6
months of the due date of the original return (not including extensions). Attach
the election statement to the amended return. At the top of the election
statement, write "Filed pursuant to section 301.9100-2." Revoking an
election. Once you elect not to deduct the special Liberty Zone depreciation
allowance for a class of property, you cannot revoke the election without IRS
consent. A request to revoke the election is subject to a user fee.
Returns filed before June 1, 2002. The rules that apply to the special
depreciation allowance discussed earlier in Rules for Returns Filed Before
June 1, 2002 under Special Depreciation Allowance also apply to the
special Liberty Zone depreciation allowance.
Increased Section 179 Deduction
Under section 179 of the Internal Revenue Code, you can choose to recover all
or part of the cost of certain qualifying property, up to a limit, by deducting
it in the year you place the property in service. For tax years beginning in
2000, that limit was $20,000. For tax years beginning in 2001 and 2002, that
limit is generally $24,000. If the cost of qualifying section 179 property placed
in service in a year is over $200,000, you must reduce the dollar limit (but not
below zero) by the amount of the cost over $200,000.
Increased Dollar Limit
The dollar limit on the section 179 deduction is increased for certain
property placed in service in the Liberty Zone. The increase is the smaller of
the following amounts.
- $35,000.
- The cost of section 179 property that is qualified
Liberty Zone property placed in service during the
year.
If you use the revised 2001 Form 4562 (dated March 2002) for a tax year
beginning in 2000, you must reduce the section 179 dollar limit to $20,000 before
adding the additional amount for qualified property. Qualified
property. To qualify for the increased section 179 deduction, your property
must be section 179 property that is either:
- Qualified Liberty Zone property, or
- Property that would be qualified Liberty Zone
property except that it is eligible for the special
depreciation allowance.
Qualified Liberty Zone property is explained earlier in Qualified Liberty
Zone Property under Special Liberty Zone Depreciation Allowance.
Property eligible for the special depreciation allowance is explained earlier in
Qualified Property under Special Depreciation Allowance. For
information on the requirements that must be met for property to qualify for the
section 179 deduction, see What Property Qualifies? on page 14 of
Publication 946.
Example 1. In 2002, you place in service in your business, which
is in the Liberty Zone, qualified property (defined earlier) costing $25,000.
Because this cost is less than $35,000, the dollar limit on the section 179
deduction is increased by $25,000 to $49,000 ($24,000 + $25,000).
Example 2. In 2002, you place in service in your business, which
is in the Liberty Zone, qualified property (defined earlier) costing $75,000.
Because $35,000 is less than the cost of the property you place in service, the
dollar limit on the section 179 deduction you can claim is increased by $35,000
to $59,000 ($24,000 + $35,000).
Reduced Dollar Limit
Generally, you must reduce the dollar limit for a year by the cost of
qualifying section 179 property placed in service in the year that is more than
$200,000. However, if the cost of your Liberty Zone property exceeds $200,000,
you take into account only 50% (instead of 100%) of the cost of qualified
property placed in service in a year.
Example. In 2002, you place in service in your business, which
is in the Liberty Zone, qualified property costing $460,000. Your increased
dollar limit is $59,000 ($35,000 + $24,000). Because 50% of the cost of the
property you place in service ($230,000) is $30,000 more than $200,000, you must
reduce your $59,000 dollar limit to $29,000 ($59,000 - $30,000).
Recapture Rules
Rules similar to those explained on page 20 of
Publication 946 under When Must You
Recapture the Deduction? apply with respect to any qualified property you
stop using in the Liberty Zone.
Returns Filed Before June 1, 2002
If you filed a return before June 1, 2002, and did not deduct the increased
section 179 amount for qualified property placed in service after September 10,
2001, you can deduct the increased amount by filing an amended return by the due
date (not including extensions) of the return for the year after the year the
property was placed in service. This rule applies to returns for the following
years.
- 2000 fiscal years that end after September 10, 2001.
- 2001 calendar and fiscal years.
On the amended return, write "Filed Pursuant to Rev. Proc. 2002-33."
Liberty Zone Leasehold Improvement Property
Qualified Liberty Zone leasehold improvement property (described earlier in Qualified Property under Special Depreciation Allowance) is 5-year
property. This means that it is depreciated over a recovery period of 5 years.
For information about recovery periods, see Which Recovery Period Applies?
on page 23 of Publication 946.
The straight-line method must be used with respect to qualified Liberty Zone
leasehold improvement property.
Under ADS, the recovery period for qualified Liberty Zone leasehold
improvement property is 9 years.
Returns Filed Before June 1, 2002
If you filed either of the following returns before June 1, 2002, and did not
depreciate qualified Liberty Zone leasehold improvement property placed in
service during the tax year as 5-year property using the straight line method,
you should file an amended return before you file your return for the year after
the year the property was placed in service.
- Your 2000 fiscal year return (for a 2000 fiscal year that ends after September 10, 2001).
- Your 2001 calendar or fiscal year return.
On the amended return, write "Filed Pursuant to Rev. Proc. 2002-33."
Table 2. Rules for Returns Filed Before June 1, 2002
Note: This chart highlights the rules for returns affected by the Job Creation and
Worker Assistance Act of 2002 that were filed before June 1, 2002, without
accounting for any of the new benefits under the law. See the text for
definitions and examples. Do not rely on this chart alone.
IF you want to... |
THEN you... |
BY... |
claim the special
depreciation allowance or special Liberty Zone depreciation
allowance |
must file an amended return |
the due date (not including
extensions) of your return for the year after the year
the property was placed in service, or |
must file Form 3115,
Application for Change in Accounting Method, with
your return for the year after the year the property was
placed in service |
the due date (including
extensions) of your return for the year after the year
the property was placed in service, and
|
must file a copy of
your completed Form 3115 with the IRS National Office |
the date you file the
original Form 3115 with your return for the year after
the year the property was placed in service. |
elect not to claim
the special depreciation allowance or the special Liberty
Zone depreciation allowance 1 |
must have filed your return
timely for the year the property was placed in service,
and |
the date that is 6 months
after the due date of the original return (not including
extensions). |
must file an amended
return stating you are not claiming the allowance |
deduct the increased section 179
amount |
must file an amended return |
the due date (not including
extensions) of your return for the year after the year
the property was placed in service. |
use a 5-year recovery period for
depreciating qualified Liberty Zone leasehold improvement
property |
should file an amended
return |
the date you file your
return for the year after the year the property was placed
in service. |
1See also Deemed election under Rules for Returns Filed
Before June 1, 2002, earlier.
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