Retroactive Business Tax Breaks May Lower Your 2001 Taxes

The Job Creation and Worker Assistance Act of 2002 (the Act), signed by the President on March 9, 2002, offers several important tax breaks to businesses. Importantly, some of the Act's business-related changes affect 2001 tax returns that have already been filed. These retroactive changes include a 30% first-year depreciation bonus deduction, a longer carryback period for 2001 net operating losses (NOLs), and a technical change regarding S corporation debt discharge income. In light of these changes, affected taxpayers should review with us their tax situation. If you have filed a return for 2001 already, you will be able to file an amended return if you will benefit from doing so.

Bonus First-year Depreciation Deduction
For tax years ending after September 10, 2001, taxpayers may claim an additional first-year depreciation deduction equal to 30% of the adjusted basis of "qualified" property. The 30% bonus is allowed for both regular tax and alternative minimum tax (AMT) purposes.

To qualify for the 30% bonus, the property must be new (not used) and depreciable under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less (with one notable exception). Qualified property includes equipment, office furniture, computers, software (other than software that must be amortized over 15 years), most leasehold improvements to leased nonresidential buildings, and certain other types of property. In addition, the taxpayer must acquire the property after September 10, 2001, and before September 11, 2004 (but only if no written purchase contract existed before September 11, 2001), or under a written contract made after September 10, 2001, and before September 11, 2004. Finally, the taxpayer must place the property in service before 2005 (or before 2006, for certain specified property with a long production lead time).

Taxpayers considering taking advantage of the 30% bonus should note how it is calculated in conjunction with the regular depreciation rules. The 30% bonus reduces the property's basis so that the regular MACRS depreciation deductions are lower.

It is important to consider how the new 30% bonus depreciation provision coordinates with the prior law's election under tax code Section 179 to expense all or part of the cost of otherwise depreciable assets in the year of purchase. If the asset's cost exceeds the dollar limit on the expensing election ($24,000 in 2001 and 2002), 30% bonus depreciation can be claimed for the balance. Amounts deducted using Section 179 first-year expensing are subtracted from the property's purchase price before the 30% bonus is calculated. In addition, regular first-year depreciation (and depreciation for future years) is calculated using the basis that remains after first-year expensing and the 30% bonus.

The new law also increases the first-year depreciation limit on "passenger automobiles" (which also include light trucks, vans, etc.) used in a business. In general, the Act increases the limit by $4,600 for vehicles acquired after September 10, 2001. Late 2001 purchases of business vehicles may mean a larger depreciation deduction for the past year.

Temporary Tax Break for Net Operating Losses
A business' net operating loss (NOL) may generally be carried back two years and carried forward 20 years. Now taxpayers may carry 2001 and 2002 NOLs back five years. Thus, 2001 NOLs can be carried back to offset 1996, 1997, and 1998 income, as well as 1999 and 2000 income. See us for more information on using an NOL for 2001 to obtain a tax refund for prior years.

S Corporation Discharge-of-debt Income
A provision of the Act overrides a taxpayer-friendly holding of the U.S. Supreme Court regarding S corporation shareholders. The new rule states that, after October 11, 2001, debt discharge income that is excluded from an S corporation's income may not be passed through to shareholders and be used to increase the shareholders' basis in the S corporation.

Adjusting to These Last Minute Changes
The retroactive provisions of the Act have caught many affected taxpayers by surprise. Even if you have already filed your 2001 tax return, it is not too late to take advantage of the retroactive tax breaks. In fact, some non-calendar year taxpayers whose 2000 tax year ended after September 10, 2001, may be able to reap benefits from the Act's provisions. We would be happy to analyze your situation and help you collect any refund that might be due.

The information provided in the newsletter has been obtained from sources believed to be reliable but its accuracy is not guaranteed.