JOB CREATION AND
WORKER ASSISTANCE ACT OF 2002
(See other tax news: 2005,  2004 or 2003)

I. Additional 30% first-year depreciation
Effective for "qualified property" acquired after Sept. 10, 2001 and before Sept. 11, 2004, the 2002 Act provides an additional depreciation deduction in the placed in service year equal to 30% of the adjusted basis of the qualified property.

The adjusted basis of qualified property is reduced by the additional 30% depreciation deduction before computing the amount otherwise allowable as a depreciation deduction for the tax year and any later tax year. The additional first year depreciation is allowed for both regular and AMT purposes for the tax year in which the property is placed in service.

Example: On Sept. 20, 2001 XYZ; a calendar year business, bought and placed in service $100,000 of five year MACRS property. Applying the half-year depreciation convention, the first year depreciation allowance under the pre-Act law is $20,000 (20%).
Under the Act, the business may claim at first year depreciation allowance of $44,000 ($100,000 x .30 = $30,000) + ($100,000 - $30,000 x .20 = $14,000).

If Section 179 expensing is claimed on qualified property, the amount expensed "comes off the top" before the additional 30% first year depreciation allowed is computed. Then the taxpayer computes regular first year depreciation with reference to the adjusted basis remaining after expensing and after the additional 30% first year allowance.

Example: The facts are the same as in the prior example, except that XYZ is eligible and elects to expense $24,000 of the cost of the assets placed in service on Sept. 20, 2001. Under the pre-Act law, the business could write off only $39,200 of the cost of the assets ($24,000 expensing + ($100,000 - $24,000 x .20 = $15,200). Under the Act, the business may write off $57,400 ($24,000 expensing + ($100,000 - 24,000 x .30 = $22,800) + ($100,000 - 24,000 - 22,800 x .20 = $10,640).

The full 30% additional depreciation allowance is available for qualified property whether the half year or midquarter depreciation convention applies in the placed in service year, and may be claimed even if the property is placed in service on the last day of the taxpayer's tax year.

The 30% additional first year depreciation allowance applies to qualified property unless the taxpayer "elects out." The election out may be made for any class of property for any tax year, and if made applies to all property in that class placed in service during that tax year.

Two situations in which a taxpayer might, for a tax year, consider making an election-out for one or more classes, are (1) where the taxpayer has about to expire net operating losses and (2) where the taxpayer anticipates being in a higher tax bracket in future years.

Property eligible for this special treatment includes:

a. Property with a recovery period of 20 years or less;
b. Water utility property;
c. Non-IRC Section 197 computer software;
d. Qualified leasehold improvements.

In order to be qualified property, the original use of the property must begin with the taxpayer after Sept. 10, 2001. "Original use" means the first use to which a property is put, whether or not that use corresponds to the use of the property by the taxpayer. Additional capital expenses incurred to recondition or rebuild acquired property would satisfy the "original use" requirement.

Example: On Feb. 1, 2002, G buys from F for $20,000 a machine that had been previously used by F. G makes an expense on the property of $5,000 of the type that must be capitalized. Whether the $5,000 is added to the basis of the property or is capitalized as a separate asset, that amount satisfies the "original use" requirement and is qualified property. No part of the $20,000 purchase price qualifies for the 30% additional first year depreciation.

II First-year depreciation for new passenger autos
For autos placed in service in 2001 and 2002, the dollar cap on first year depreciation is $3,060. The 2002 Act increases by $4,600 the first year depreciation dollar limit for a passenger auto that is qualified property. In other words, the maximum first year depreciation allowance for a new passenger auto acquired and placed in service after Sept. 10, 2001, and before 2003, and used entirely for business is $7,660.

III Temporary increase in NOL carryback period
A net operating loss may be carried back two years and carried forward twenty years. The carryback period may be waived. The Act increases the carryback period to five years for NOLs arising in tax years ending in 2001 or 2002. A taxpayer may irrevocably elect, in a manner prescribed by IRS, to forgo the five-year carryback period and instead carry the NOL back 2 years. The statute literally requires 2 waiver elections in a situation where the taxpayer wants to waive the 5 year and 2 year carryback periods.

IV New York City Liberty Zone
The Liberty Zone is the area of Manhattan located on or south of Canal Street, East Broadway or Grand Street.
The 2002 Act increases the amount that can be expensed for property used in the Liberty Zone. The first year depreciation is increased from $24,000 to $35,000. The original use of the property in the Liberty Zone must commence with the taxpayer after Sept. 10, 2001; the taxpayer must acquire the property by purchase after Sept. 10, 2001, and must be placed in service before 2007. Substantially all of the use of the property must be in the Liberty Zone in the active conduct of a trade or business of a taxpayer in that zone.
The 30% additional first-year depreciation also applies to nonresidential real property and residential rental property, but only to the extent that it rehabilitates real property damaged, or replaces real property destroyed or condemned as a result of the terrorist attacks of Sept. 11, 2001.
The cost of qualified leasing improvement property (generally a non-structural, non-expansion improvement to an interior portion of an existing nonresidential building, that is located in the Liberty Zone, may be depreciated on a straight-line basis over 5 years.

Bush OK's tax breaks for families of terror victims

President George W. Bush recently signed into law a measure providing tax breaks for the families of September 11 victims.

The law waives the federal income tax liability of those who died in the terror attacks for the year of the attack (2001) and the previous one (2000.) It also shields victims' estates of up to $8.5 million from federal inheritance taxes and eliminates the taxation of death benefits, charitable contributions and debt forgiveness.

In addition to those who died on September 11, the measure protects those killed by Anthrax attacks and victims of the 1995 Oklahoma City bombing.

See other tax news: 2005,  2004 or 2003