|
Summary of the 2002 Tax Act
|
Provisions Taking Effect for 2001
|
Business Provisions
The two biggest tax breaks directly affecting businesses are the creation of a temporary 30 percent depreciation bonus and an extension of the net operating loss (NOL) carryback period from two to five years (with a waiver of the alternative minimum tax depreciation for this allowance). These provisions are extremely important when heading into your 2001 tax-filing season because they may result in an immediate tax savings for your business.
If you have already filed your 2001 federal tax return, don't panic. If you qualify, you can still get the benefit of one of the tax breaks by simply filing an amended return.
|
Depreciation Bonus
Businesses are now entitled to an additional first-year depreciation deduction equal to 30 percent of the value of certain types of qualified property. Qualifying property includes:
- property with a recovery period of 20 years or less
- water utility property
- certain types of computer software (i.e., customized software)
- qualified leasehold improvements
As you can see, this covers a very broad range of property eligible for the extra depreciation deduction. The catch is that such property must be acquired after September 10, 2001, and before September 11, 2004. In addition, the property must be placed in service on or after September 11, 2001, and before January 1, 2005.
The extra depreciation deduction can be used in addition to the small business expensing election, which allows a deduction of up to $24,000 for assets purchased and placed in service in 2001 or 2002. In addition, a business that purchases a vehicle and can't take advantage of the expensing election because of the depreciation cap on such vehicles can claim an extra $4,600 in the year the vehicle is placed in service. Keep in mind, though, that both the purchase and business use have to start after September 10, 2001.
The retroactive effect of this tax break for purchases is a big help to businesses trying to recover from the September 11 disaster. For other businesses, the tax break is a bit of a windfall if a business just happened to buy and start using property at the end of last year. However, this shouldn't diminish your use or enjoyment of the tax break if you are lucky enough to qualify for it.
Back to Index
|
New York City Liberty Zone
The Job Creation Act establishes a New York City Liberty Zone (essentially southern Manhattan) and offers additional tax breaks for businesses recovering from the September 11 terrorist attacks. The new tax breaks also supplement those provided by the Victims of Terrorism Tax Relief Act of 2001, enacted January 23, 2002.
The tax breaks related to the Liberty Zone apply to tax years ending after 2001. The following are highlights of the Liberty Zone provisions that are most likely to affect a business:
- The maximum expensing election limit is increased to $35,000 (instead of $24,000) for those within the zone.
- An additional 30 percent depreciation deduction is added to the normal first-year depreciation deduction.
- The Work Opportunity Tax Credit is extended to a new targeted group which includes:
- Individuals substantially performing all their services in the recovery zone for a business in the zone.
- Individuals substantially performing all their services in New York City for a business that had to relocate out of the zone due to the terrorist attacks.
Back to Index
|
Interaction of the Rate Reduction Credit with Refundable Child Credit
The bill clarifies that the rate reduction credit is a nonrefundable credit that is claimed prior to determining the refundable amount of child credit. This change is already reflected in the IRS instructions and the individual tax program.
Back to Index
|
Sec. 311 Election on the sale of a Principal Residence
The bill clarifies that the gain recognized in a Sec. 311 election on the sale of a principal residence does not qualify for the exclusion on the gain from the sale of a principal residence. It also clarifies that the "deemed sale" under Sec. 311 is not a complete disposition allowing an unlimited deduction of suspended passive activity losses from an activity. However, if a deemed sale is elected with respect to a passive activity asset, the gain recognized with respect to such an election will be considered to be a passive gain for passive activity purposes.
Back to Index
|
Net Operating Losses
A business can generally carry back an NOL two years (three years when casualty losses are involved). The Job Creation Act temporarily extends the carryback period to five years for losses arising in tax years 2001 and 2002. The NOL deduction can also be used to reduce alternative minimum taxable income liability up to 100 percent.
A qualifying business must elect out of this special treatment or else be bound by it. Unfortunately, the Job Creation Act leaves it up to the IRS to establish the opt-out procedures.
Back to Index
|
S Corporation Basis not Increased by Cancellation of Debt Income
Income from the discharge of indebtedness of an S corporation that is excluded from the S corporation's income is not taken into account as an item of income by any shareholder and thus does not increase the basis of any shareholder's stock in the corporation.
The provision generally applies to discharges of indebtedness after October 11, 2001. The provision does not apply to any discharge of indebtedness before March 1, 2002, pursuant to a plan of reorganization filed with a bankruptcy court on or before October 11, 2001.
Back to Index
|
Provisions Taking Effect After 2001
|
Deduction for Teacher Supplies
For the 2002 and 2003 tax years, teachers can deduct up to $250 of teaching supplies that they purchased for use in the classroom. This is a deduction in computing adjusted gross income, so like student loan interest, it will be deductible even if the taxpayer does not itemize deductions. Teachers, counselors, principals, or aides teaching elementary or secondary students (kindergarten through grade 12) qualify for this deduction.
Back to Index
|
Child Care Credit
If one spouse is a student or unable to care for him or her self, he or she will be deemed to have earned income of $250 per month or $500 per month if they have more than one qualifying child (for child care credit purposes only). Formerly these amounts were $200 and $400. This provision takes effect in 2003.
Back to Index
|
Penalty on Coverdell Education IRA Distributions
If the taxpayer elects to forgo the income exclusion for education IRA distributions so that they can claim the education credit, the 10% penalty tax will not apply to the extent the distribution is used to pay for higher education expenses which are being used to claim the education credit.
Back to Index
|
Adoption Credit Provisions Clarified
In the case of amounts paid for adoptions prior to 2002, which do not become final until after 2001, the $5,000 limit applies with respect to the limit on qualified adoption expenses.
Back to Index
|
Medical Savings Accounts
The availability of Archer Medical Savings Accounts (MSAs) has once again been extended for another year (through the end of 2002). Employees of small businesses (50 or fewer employees) and self-employed individuals can continue to set up Archer MSAs to pay health care expenses, provided the accounts are used in connection with high-deductible health insurance.
Back to Index
|
Personal Credit Offset of Alternative Minimum Tax
This provision was originally scheduled to expire in 2001. The provision has been extended through 2002 and 2003. Also for 2002 and 2003, the foreign tax credit will be claimed before the other credits as it was in 2001.
Back to Index
|
Net Income Limit on Marginal Properties
Depletion on marginal oil and gas properties will not be limited by the amount of net income for 2002 and 2003.
Back to Index
|
Credit for Qualified Electric Vehicles
Once set to begin phasing-out in 2002, taxpayers can now take the full amount of this credit for an additional two years, through 2003. The maximum tax credit allowed for qualified electric vehicles placed in service in 2002 and 2003 is 10 percent of its cost (up to $4,000). The phase-out of this credit that was to begin in 2002 has been postponed until 2004, when the credit will be reduced by 25 percent. The credit will then be reduced by 50 percent in 2005, by 75 percent in 2006, and will be eliminated entirely in 2007.
Back to Index
|
Work Opportunity Credit
The incentive for employers to hire persons from certain disadvantaged groups has been extended through the end of 2003. Not only is this a break for those in such disadvantaged groups, employers can also continue to get a reward (up to $2,400 per employee) for hiring such employees in either 2002 or 2003.
Back to Index
|
Welfare-to-work Credit
Similar to the Work Opportunity Credit, the credit for hiring qualified long-term family assistance recipients has been extended through the end of 2003. For small business employers in the market to hire new employees, this means that there is a two-year maximum credit of $8,500 per employee available to help defray the substantial costs involved in keeping an employee on the payroll.
Back to Index
|
Electronic Filing of Forms 1099
Effective on the date of enactment, taxpayers can electronically furnish 1099s to recipients, provided that the recipient consents to receive these forms electronically.
Back to Index
|
Recapture of Employer Credit for Child Care Assistance
It is clarified that the recapture tax for recapturing this credit is treated the same as the recapture tax for investment credit and cannot be taken into account when computing alternative minimum tax.
Back to Index
|
Ordering Rules for the Passive Activity $25,000 Special Rental Real Estate Allowance Clarified
The $25,000 rental real estate allowance is first applied to passive activity deductions other than the commercial revitalization deduction. It then is applied to the commercial revitalization deduction, then to passive activity credits other than rehabilitation credits or low-income housing credits. It then is applied to the rehabilitation credit and finally the low-income housing credit.
Back to Index
|
Indian Employment Credit
This credit has been extended another year and will now expire at the end of 2004. This is good news if your business is located on an Indian reservation because it allows more opportunity to claim this special tax credit (up to $20,000 per qualified employee).
Back to Index
|
Electricity Produced by Renewable Sources Credit
The placed in service date for qualifying property for the general business credit for electricity produced by renewable sources (Form 8835) is extended from 2001 to 2003.
Back to Index
|
Deduction for Clean Fuel Vehicles
Similar to the electric vehicle credit above, the deduction from a business owner's gross income for using vehicles powered by cleaner-burning fuels has been extended through 2003. The deduction for qualified vehicles placed in service after that will be reduced by 25 percent in 2004, 50 percent in 2005, 75 percent in 2006, and eliminated completely in 2007. This phase-out would have begun in 2002 if not for the new legislation.
Back to Index
|
Credit for Qualified Zone Academy Bond
The corporate tax credit for holders of qualified zone academy bonds was scheduled to expire for bonds issued after 2001. The credit has been extended to bonds issued in 2002 and 2003.
Back to Index
|
Differential Earnings Rate for Life Insurance Companies
For the 2001, 2002, and 2003 tax years the differential earnings rate is treated as zero, thereby suspending the limitation on the reduction of certain deductions of mutual life insurance companies.
Back to Index
|
Subpart F Provisions
The legislation extends for five years the present-law temporary exceptions from subpart F foreign personal holding company income, foreign base company services income, and insurance income for certain income that is derived in the active conduct of a banking, financing, or similar business, or in the conduct of an insurance business.
Back to Index
|
|
|
