The Job Creation and Worker Assistance Act of 2002 (HR 3090) is a somewhat scaled back version of what the White House and Republicans originally proposed immediately after September 11th. The President has indicated that he will sign the package when it reaches his office. Nevertheless, the final bill remains a major tax bill with many important provisions affecting both businesses and individuals. One important consideration is that many of the new bill’s tax breaks are retroactive to 2001 affecting some already filed tax returns.
Taxpayers are now entitled to an additional first-year depreciation deduction equal to 30% of the adjusted basis of qualified property. The 30% “bonus depreciation” is allowable for regular and alternative minimum tax purposes for the tax year in which the property is placed in service. Property eligible for this special treatment includes:
- Property with a recovery period of 20 years or less
- Water utility property
- Non-IRC Section 197 computer software
- Qualified leasehold improvements
The property must be acquired after September 10, 2001 and before September 11, 2004. Use of the property must start on or after September 11, 2001 and the property must be placed in service before January 1, 2005. The basis of the property and the depreciation allowances in the year of purchase and in later years must be adjusted to reflect the additional first-year depreciation deduction.
Property may also qualify for both Section 179 small business expense election and the 30% depreciation bonus. Additionally, automobiles purchased between September 11, 2001 and September 10, 2004 may receive up to an additional $4,600 in depreciation in the year the car is placed in service.
Net Operating Losses
The new law temporarily extends the “old” two-year carryback period to five years. This law also extends other “three” year carryback losses such as casualty losses to five years. This is effective for losses that occur in tax years ending in 2001 and 2002. The new law also allows these losses to reduce alternative minimum taxable income to zero.
Service oriented businesses, such as health, law and consulting, may exclude from income amounts form the performance of services that they anticipate will not be collected.
S Corporation Indebtedness
In Gitlitz vs. Commissioner, 531 US 206, the Supreme Court found that while IRC Section 108(a) provides that discharge of indebtedness income ceases to be included in gross income when the S corporation is insolvent, it does not provide that discharge of indebtedness income ceases to be an item of income for purposes of allowing the shareholder an increase in basis that can allow the pass through of otherwise suspended corporate losses.
The new law reverses this decision. The discharged amount excluded from an S corporation’s income is not expressly treated as an item of income by a shareholder so the shareholder’s basis is not increased. Generally, this applies to discharges of indebtedness income after October 11, 2001.
Electronic 1099 Forms
As long as the recipient of the Form 1099 agrees, these can now be sent electronically.
Defined Benefit Plan Contributions
Certain factors led to a decline in the interest rates used to determine additional required contributions for defined benefit plans since a low rate may make a plan look underfunded. The new law expands the range to 120%; the old limit was 105%.
Foreign Personal Holding Company Income
US tax is deferred until the foreign personal holding company income is repatriated until December 31, 2006 under the new law.
Expiring Business Tax Credits
The following business tax credits scheduled to expire December 31, 2001 have been extended for two years until December 31, 2003:
Alternative Minimum Tax
- Work Opportunity Tax Credit
- Welfare-to-Work Tax Credit
- Credit for producing electricity from wind, boimass and poultry litter
- Taxable income limit on percentage of depletion from marginal wells
- Clean-fuel vehicle deduction
- Qualified zone academy bonds
- Cover over payments to Puerto Rico and the Virign Islands
- Tax on failure to comply with mental health parity requirements
- Suspension of reduction of deductions for mutual life insurance companies
- Tax incentives for investment in Native American reservations
- Energy incentives
- The Liberty Zone
- The taxpayers in the “Liberty Zone”, southern Manhattan, will be able to take advantage of special incentives, which include
- Section 179 expensing deduction is increased to a maximum of $35,000 for the cost of qualifying property put into service during the year.
- An additional 30% depreciation deduction is available in the first year to qualified property for regular and alternative minimum tax purposes.
- The Work Opportunity Credit is available to individuals who either performs substantially all their services in the recovery zone for a business or substantially perform all their services for a business relocated from the zone to somewhere else in New York City due to the terrorist attacks.
- A longer replacement period of five years applies to involuntarily converted property due to the terrorist attacks, if replaced with property to be substantially used in New York City.
- Qualified leasehold improvements will be five year property for depreciation deductions if put in service after September 10, 2001 and before January 1, 2007.
The new bill allows taxpayers to use all of the nonrefundable tax credits through December 31, 2001. For the 2002 and 2003 tax years, AMT taxpayers will continue to use these nonrefundable credits to their fullest. However, after December 21, 2002, only the child tax and adoption credits will be permitted.
Elementary and secondary teachers will be allowed an above the line deduction of up to $250 annually for qualifying classroom expenses for 2002 and 2003.
Archer Medical Savings Accounts
Medical Savings Accounts were extended through December 31, 2001.
The new bill expands the definition of payments and who is a foster care individual giving these taxpayers exemption from certain payments from income.