The "Job Creation and Worker Assistance Act of 2002," legislation intended to help stimulate the U.S. economy, was passed by the House of Representatives on Thursday, March 7 and by the Senate on Friday, March 8; and was signed by the President on Saturday, March 9. The business provisions of the Act apply to applicable taxpayers' 2001 tax years, for which tax returns may have already been filed or are in the process of being prepared. Needless to say, for CPAs and other tax return preparers hastening to meet the March 15 and April 15 deadlines for calendar year clients, the timing could have been better. Taxpayers affected by the Act, including fiscal year 2001 taxpayers, who have already filed their returns, will need to file amended returns if they wish to receive the benefits of the Act.*

This Washington Tax Alert summarizes the business provisions of the Act. The Act also extends various tax incentives scheduled to expire; includes technical corrections to prior tax legislation; and provides unemployment assistance, tax benefits for New York City areas damaged by the September 11 terrorist attacks, and assistance to families in need. The Act also legislatively repealed a 2001 Supreme Court federal tax case, Gitlitz v. Commissioner, involving shareholders’ tax basis in insolvent S corporations.

Business Provisions
Additional First-Year Depreciation for Qualifying Property
In general, taxpayers who purchase or produce new depreciable personal property (including certain qualified leasehold improvement property) after September 10, 2001 and before September 11, 2004 (and not pursuant to a written binding obligation in effect before September 11, 2001) are entitled to a 30 percent deduction in the year the property is placed in service, in addition to the $24,000 asset expense election and regular depreciation under current law. For example, assume that in October 2001, a corporation with a December 31 tax year purchased and placed in service new machinery with a cost of $100,000. If the machinery qualifies for and the taxpayer elects the asset expense election, the corporation would deduct on its 2001 return $24,000, plus under the Act an additional $22,800 (30% x ($100,000 - $24,000)). The machinery's remaining adjusted basis of $53,200 ($100,000 - $46,800) would be depreciated beginning in 2001 under normal depreciation rules.

A taxpayer may "elect out" of the 30 percent additional depreciation allowance for each class of property, which may be beneficial if, for example, the taxpayer had a net operating loss in 2001 with no prior years of taxable income to carry the loss back. The Congressional Joint Committee on Taxation has informed us that despite the "election out," taxpayers who filed their return without claiming the 30 percent additional depreciation on qualifying property should be allowed to later amend their return to claim the additional allowance.

Five-Year Carryback of Net Operating Losses
The Act extends the general net operating loss ("NOL") carryback period from two years (three years for NOLs arising from casualty or theft losses of individuals or attributable to certain Presidentially declared disaster areas) to five years for NOLs in taxable years ending in 2001 and 2002. Similar to prior law, a taxpayer may elect to forego the five-year carryback period, which may be advisable where income in the 20-year carryforward period is expected to be taxed at a higher tax rate than the income in the carryback period.

Full Offset of NOLs Against Alternative Minimum Taxable Income
For taxable years ending in 2001 and 2002, the Act repeals the rule that limits an NOL deduction for taxpayers subject to the alternative minimum tax ("AMT") from offsetting more than 90 percent of Alternative Minimum Taxable Income ("AMTI"). NOL carryforwards to, and NOL carrybacks from, taxable years ending in 2001 and 2002 can now offset 100 percent of AMTI.

*While many states adopt the federal tax law including amendments, it should not be assumed that the provisions of the Act have been or will be adopted by all states.

TOP