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University of Massachusetts Amherst

Family Business Center

2002 Tax Legislation - Tax Impact of Stimulus Provisions on Business

by Kris Houghton, Tax Partner, Meyers Brothers, PC

Businesses and investors finally have some long-awaited tax relief. The Job Creation and Worker Assistance Act of 2002 , signed by the President on March 9, 2002, provides $120 billion in tax relief over the next four years. In several critical areas, relief is retroactive to 2001. This new tax law was designed to get money back into the hands of business and investors ... fast. We can help you get your share by filing refund claims or applying these incentives to extended returns. You may also want to revise your tax strategy for 2002 and 2003 to help you maximize your tax benefits under this windfall piece of legislation.

Bonus depreciation:

If you own a business or invest in one, you probably can benefit substantially from the new law's special depreciation provision. This provision --perhaps the most important one in the new law-- saves significant up-front tax dollars. It allows an additional 30 percent depreciation deduction on the purchase of new assets for use in your business, on top of any other "first year" depreciation that you are allowed to take.

This "bonus" depreciation was designed not only to encourage you to buy new equipment for your business but also to reward you for purchases made since September 11, 2001. Retroactive application of the new law means that you already could be due a substantial refund on your 2001 tax return if you apply the new rules on an amended return. This depreciation --and its resulting refund-- is not automatic, however. You must file an amended 2001 return in most cases to claim it. In filing such a claim, adherence to new rules determining what assets "qualify" for the additional "bonus" depreciation as well as its effect on any Section 179 depreciation you may have claimed. Thorough reading of the legislation is suggested since in addition to tangible personal property, certain leasehold improvements also qualify for this "bonus" depreciation. You may also be pleasantly surprised to learn that there are no dollar valued phase-out limits for this deduction.

New business vehicles:

The net price of a new passenger vehicle used primarily in your business just got lower. The regular tax rules limit the amount you can deduct as a business expense on the purchase of a vehicle - this cap is $3,060 for 2001 and 2002. Now, the new law allows you an additional maximum $4,600 deduction for a total $7,660 deduction possible in the year in which you purchase and first use your new car or light truck in your business.

The additional deduction is limited. The purchase under the new deduction must involve a new vehicle; used vehicles do not qualify. If your business purchased its new vehicle between September 11, 2001 and January 1, 2002, you'll need to revise your 2001 tax return to reap the benefits of the change.

Extended net operating loss carrybacks:

Businesses that have been experiencing difficult times lately have also been given a break. Congress is allowing business losses realized in 2001 and 2002 --as a special short-term economic stimulus-- to be "carried back" to the tax return up to five years ago. That's three more years than the usual two-year carryback period.

The new five-year carryback loss period creates opportunities both for immediate tax refunds and for future tax benefits. Business losses from 2001, for example, can now offset profits realized in 1997 and entitle the business to a tax refund. Certain formal elections must be made in certain cases to maximize benefits under this new provision.

Extensions of credits/deductions:

The Work Opportunity Tax Credit and some energy credits and deductions have been given new life. They had officially expired on December 31,2001, but now are extended without interruption through 2003.

New York City Liberty Zone: Congress has provided special tax relief to help New York City rebuild from the terrorist attacks. The new law gives businesses and individuals in the "Liberty Zone" (southern Manhattan) special, temporary tax breaks, including an enhanced depreciation bonus, increased small business expensing, an expanded Work Opportunity Tax Credit; and more liberal involuntary conversion rules.

A bit of bad news: Although the new law is valuable to most taxpayers, its provisions are not positive for everyone. Certain businesses are negatively affected, including:

  • some shareholders of S corporations that receive debt discharge income from creditors that is not taxed as income; and
  • professionals in a service business who account for income from clients or patients using the "nonaccrual experience" method.

If you are an S corporation shareholder or operate a service business, the new law limits your ability to deduct losses. Of course, the losses could be valuable under other provisions of the Tax Code.

Now is the time to learn more about the new tax law or to seek assistance on claiming some of the new benefits.

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