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.

1. It is one of the following types of property.
   1. 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.
   2. Used water utility property. See 25-year property on page 22 in Publication 946.
   3. 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.)
   4. Certain nonresidential real property and residential rental property (defined later).
2. It meets the following tests (explained later under Tests to be met).
   1. Acquisition date test.
   2. Placed in service date test.
   3. Substantial use test.
   4. Original use test.
3. 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.

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.

Table 2. Rules for Returns Filed Before June 1, 2002

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
	· must file an amended return stating you are not claiming the allowance	· the date that is 6 months after the due date of the original return (not including extensions).
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.

How To Get Tax Help

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For more information, see Publication 1546, The Taxpayer Advocate Service of the IRS.

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The CD-ROM can be purchased from National Technical Information Service (NTIS) by calling 1-877-233-6767 or on the Internet at www.irs.gov. The first release is available in mid-December and the final release is available in late January.

IRS Publication 3207, Small Business Resource Guide, is an interactive CD-ROM that contains information important to small businesses. It is available in mid-February. You can get a free copy by calling 1-800-829-3676 or visiting the IRS web site at www.irs.gov.

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