Earlier this year, President Bush signed into law the “Job Creation and Worker Assistance Act of 2002”, commonly referred to as the Economic Stimulus Bill. This legislation contained several significant, retroactive changes to the tax code that may affect certain 2000 and 2001 tax returns. A summary of the three major provisions of the Economic Stimulus Bill follows.
30% Bonus Depreciation
For qualified property acquired after September 10, 2001 and before September 11, 2004 (a 36-month period), a taxpayer may claim an additional first-year depreciation deduction equal to 30% of the adjusted basis of such property. The property cannot have been acquired pursuant to a written binding contract in effect before September 11, 2001 and original use of the property must commence after September 10, 2001.
Qualified property for purposes of the 30% bonus depreciation includes:
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Depreciable property subject to MACRS with a recovery period of 20 years or less;
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Computer software, other than software acquired as part of the acquisition of a trade or business; and
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Qualified leasehold improvements – made under a lease to commercial property and placed in service more than 3 years after the building was first placed in service. Expenditures attributable to the enlargement of the building, any elevator or escalator, any structural component benefiting a common area, or the internal structural framework of the building are ineligible.
The 30% bonus depreciation is allowable for both regular tax and alternative minimum tax purposes. After claiming the bonus depreciation, existing depreciation rules apply to the remaining 70% of the cost basis of the asset(s). Amended tax returns can be filed in order to claim the bonus deprecation on qualified property placed in service by fiscal year filers with tax years ended 9/30/01, 10/31/01 and 11/30/01, as well as by 2001 calendar year filers who may have filed prior to the enactment of this legislation.
Five-Year Carryback of Net Operating Losses
Prior to this legislation, a net operating loss (NOL) could generally be carried back two years or carried forward 20 years. For NOLs arising in tax years ending in 2001 and 2002 the carryback period has been extended to 5 years. An NOL deduction attributable to NOL carrybacks arising in tax years ending in 2001 and 2002, as well as NOL carryovers to these taxable years, can offset 100% of a taxpayer’s alternative minimum taxable income (normally limited to 90%).
After incurring an NOL, a taxpayer has always had the ability to elect to forego the carryback and thus carry forward the loss. A taxpayer can elect out of the five-year carryback and opt for a two-year carryback if determined to be beneficial. Taxpayers can also completely forego the carryback of the loss and carry it forward in its entirety if desired. The decision whether to carry back or carry forward an NOL is fact sensitive. It is based on the taxable income reported and tax bracket that a taxpayer was subject to in prior years to which the NOL can be carried versus the anticipated taxable income that will be reported in the subsequent year.
New York City Liberty Zone
Taxpayers located in a newly created Liberty Zone – the area located on or south of Canal Street, East Broadway, or Grand Street in New York City, are entitled to various additional tax benefits including the following:
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A $35,000 increase in the annual maximum IRC Sec. 179 expense deduction.
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Qualified leasehold improvements placed in service after September 10, 2001 and before January 1, 2007 can be depreciated over a fiveyear period (normally 39 years).
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Expansion of the Work Opportunity Tax Credit to cover individuals who perform substantially all their services in the Liberty Zone.
Other Provisions of the Bill
A number of tax credits and deductions that had expired on December 31, 2001 were extended for two years until December 31, 2003 and several technical corrections were made prior to legislation, mainly in the retirement plan area. Two other noteworthy provisions of the bill are the following:
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The reversal of the Supreme Court’s decision in the Gitlitz case for discharges of indebtedness income after October 11, 2001.
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An above-the-line deduction for teachers in elementary and secondary schools of up to $250 annually for 2002 and 2003 for out-of-pocket expenses for supplies, books and equipment.
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