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CURTIS, BAILEY, EXELBY & SPOSITO, P.C.
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The Job Creation and Worker Assistance Act of 2002
On March 9, 2002, President Bush signed into law economic stimulus legislation (the Job Creation and Worker Assistance Act of 2002) largely aimed at encouraging businesses to invest more money in equipment and other assets by allowing them to deduct their costs more quickly. The new law also makes several other changes in the federal tax code that businesses may be able to take advantage of immediately. Depreciation Overview Although businesses might benefit if they could simply deduct the full cost of their asset acquisitions in the year of purchase, the tax law generally doesn’t allow that approach. Instead, the law states that these costs in most cases must be recovered over time through annual depreciation deductions. Deductions must be spread out regardless of whether a business pays cash or finances the purchase. For tangible property (property with a physical existence), the amount of the annual depreciation deduction is usually determined under a series of rules called the Modified Accelerated Cost Recovery System(MACRS). To figure the deduction for a particular item, one must know not only the property’s cost, but also the recovery period, depreciation method, and placed-in-service convention applicable to that type of property under MACRS. Various IRS regulations and procedures spell out the details. 30% Depreciation “Bonus” The economic stimulus legislation offers businesses an opportunity to significantly increase their first-year depreciation deductions. The tax savings that result might be used to help finance the purchases themselves or meet other business objectives. For a limited time only, the legislation provides an additional first-year depreciation “bonus” equal to 30% of the adjusted basis (e.g.,the cost) of qualified property. The bonus depreciation deduction is available for both regular tax and alternative minimum tax purposes and doesn’t preclude the regular deduction for first-year depreciation. However, the 30% deduction is subtracted from the property’s adjusted basis when computing the regular deduction. Note that a business may “elect out” of the additional 30% first-year depreciation for one or more classes of property for any tax year. The election-out might be desirable if a business expects to be in a significantly higher tax bracket in the future. Similarly, a business might want to elect out if it has a soon-to-expire net operating loss (NOL) that it is carrying forward. In this situation, the additional first-year depreciation deduction might be counterproductive if it would lower the business’ taxable income to a point where the NOL expires because it couldn’t be deducted. Which Property Qualifies To be eligible for the additional 30% first-year depreciation, property must be subject to the general rules of MACRS (i.e., the alternative depreciation system can’t be used). The property must have a recovery period of 20 years or less or be eligible computer software, water utility property, or a qualified lease-hold improvement to the interior of a nonresidential building. Qualifying property generally must be placed in service before January 1, 2005, and be:
Acquired after September 10, 2001, and before Under another requirement, the 30% first-year additional depreciation deduction is available only if the original use of the property begins with the taxpayer after September 10, 2001. Thus, the property generally must be new property. However, capital expenses incurred to recondition or rebuild an asset that a business acquires or already owns also may satisfy the original use requirement. Businesses can take advantage of the additional first-year depreciation in taxable years ending after September 10, 2001. Thus, calendar-year businesses should review their 2001 asset purchases to see if any of the assets qualify for the deduction. Non calendar-year taxpayers with 2000 tax years that ended after September 10, 2001, also should review their situations. In either case, if a return has already been filed, the new benefit can be claimed on an amended tax return. Residential rental property (depreciable over 27.5 years under MACRS) and nonresidential real property (depreciable over 39 years) aren’t included in the categories of assets eligible for the additional 30% first-year depreciation. However, certain improvements to a leased nonresidential building may qualify. In planning improvements to buildings that were recently placed in service, consideration should be given to the new law’s requirement that there be more than three years between the dates the building and improvements are placed in service. Interaction with Section 179 Small businesses that can take advantage of the election under Section 179 of the tax code to expense the cost of depreciable assets in the year of acquisition also may be able to utilize the additional 30% first-year depreciation available under the economic stimulus legislation. Opportunities to coordinate the two tax breaks may be available when the dollar amount of assets purchased during the year exceeds the dollar limit on Section 179 expensing – currently $24,000 of tangible personal property (increasing to $25,000 for 2003 and later years). Note, however, that the Section 179 election begins to phase out when purchases of otherwise eligible assets exceed $200,000 and isn’t available once the total reaches $224,000 ($225,000 in 2003 and later years). Still, where possible, combining the two tax breaks may produce very positive tax results. Passenger Automobile Depreciation The tax law caps the amount of annual depreciation a business taxpayer may claim for “passenger automobiles” (vehicles, including some trucks, that weigh 6,000 pounds or less and that are used in the business). The economic stimulus legislation increases the first-year depreciation dollar limit by $4,600 for such vehicles acquired after September 10, 2001, and placed in service before January 1, 2005. Thus, for example, if a vehicle is placed in service during 2002 and used entirely for business, this change raises the dollar cap on first-year depreciation from $3,060 to $7,660. Note that, for companies that purchase vehicles for employee business use, this increase in the first-year depreciation limit can mean significant tax benefits. Note also that a car won’t be eligible for the additional first-year depreciation unless it is used more that 50% for trade or business purposes. And, if business use of the car falls to 50% or less in a subsequent year, the business may have to recapture (include in income) a portion of the depreciation previously claimed. Net Operating Losses A net operating loss (NOL) is the excess of business deductions (with certain adjustments) over business income for the year. Carrying back an NOL to a previous tax year allows taxpayers to offset taxable income in the carryback year and obtain a tax refund. The economic stimulus legislation temporarily extends the generally applicable carryback period from two to five years for NOLs arising in taxable years ending in 2001 and 2002. NOLs that aren’t carried back may be carried forward for up to 20 years to reduce future taxable income. As under prior law, a taxpayer may elect to waive the carryback period. Deductions for NOLs attributable to carrybacks arising in taxable years ending in 2001 and 2002 – as well as NOL carryforwards to 2001 and 2002 – may offset 100% of alternative minimum taxable income. Normally, an NOL deduction may not reduce alternative minimum taxable income by more than 90% of the income. To obtain a tax refund from an NOL carryback, a corporation may use Form 1139, Corporation Application for Tentative Refund, or Form 1120X, Amended U. S. corporation Income Tax Return. The corporation must file its income-tax return for the NOL year before it files Form 1139. The form is due no later than one year after the year the NOL was sustained. There is a three-year deadline for filing Form 1120X (measured from the due date of the loss year return, plus extensions). Individuals use Form 1045, Application for Tentative Refund, or Form 1040X, Amended U.S. Individual Income Tax Return, to carry back an NOL. Note that, for some businesses, the new law’s depreciation changes may result in an NOL for 2001 (or for non-calendar year taxpayers, for 2000) that may not have been realized under prior law. Businesses need to examine their situations, and, in the case where a tax return has already been filed, an amended return and NOL claim may be warranted. Other Provisions The economic stimulus legislation contains several other tax provisions of interest to businesses. New York City Tax Relief. The new law provides tax benefits for businesses located in the area of New York City damaged by the terrorist attacks (the ”Liberty Zone”). Among those benefits:
Creation of a new targeted group that includes certain Electronic Forms. Prior to the legislation, businesses could choose to furnish Form W-2, Wage and Tax Statement, by electronic means to those employees who consented to that form of delivery. Beginning with tax years ending after March 9, 2002, the new law allows additional specified information returns (for example, Form 1099) to be provided to recipients electronically, as long as the recipient has consented. Planning tip: Most businesses with significant reporting requirements should find electronic delivery to be very cost effective. If this is the case, a business should begin developing ways to take advantage of this provision for its 2002 tax year information returns. Pension Corrections. The new law contains numerous technical corrections to prior laws. Many of the corrections relate to pension legislation included in the Economic Growth and Tax Relief Reconciliation Act of 2001. Among other items, the new legislation:
Clarifies that the small business tax credit for new Extension of Expiring Tax Credits. Prior to the new law, the Work Opportunity Tax Credit and the Welfare-to-Work Tax Credit (two incentives for hiring certain targeted groups of workers) applied only to wages paid to or incurred in regard to a qualified employee who began work before 2002. The new law extends both credits for wages paid to a qualified individual who begins work after 2001 and before 2004. Thus, hiring workers in the targeted groups will continue to provide tax benefits to employers. In addition, the tax credit for using alternative energy sources (e.g.,
wind) for the production of electricity is extended to apply to qualified
facilities placed in service before 2004. Under previous law, the
credit applied only to facilities placed in service before 2002.
Also, effective for property placed in service after 2001, the new law
makes the full 10% credit for the purchase of electric vehicles available
for qualified purchases made in 2002 and 2003, and phases down the credit
from 2004 through 2006. It will not be available for vehicles placed in
service after 2006. Under prior law, the credit was to have been
phased out from 2002 through 2004.
This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that it does not constitute tax, legal, accounting, or other professional service. |
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