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Last Updated on:
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Tax Planning Opportunity
"Job Creation and Worker Assistance Act of 2002"
affects 2001 returns
On March 9th, the President signed into law the “Job Creation and Worker Assistance Act of 2002” (PL 107-147). The Act is a combination of business economic stimulus provisions, relief provisions for lower-Manhattan businesses affected by the 9/11 terrorist attacks, a 13-week extension of unemployment benefits, extensions for expired or soon-to-expire tax breaks, and technical corrections.
Following is an overview of the Act provisions affecting 2001 tax returns. Additional first year depreciation allowance. Effective for property placed in service after Sept. 10, 2001, the Act allows taxpayers to claim an additional first-year depreciation deduction equal to 30% of the adjusted basis of qualified property. This is property that meets the following conditions: ... It is MACRS-eligible property with a recovery period of 20 years or less; computer software other than software that must be amortized over 15 years under Code Sec. 197; or qualified leasehold improvement property. In general, a qualified leasehold improvement is an interior improvement made under a lease to commercial property (such as an office building or warehouse), and placed in service more than three years after the building was first placed in service. Certain structural improvements don't qualify, and neither do expansions. ... The property is acquired by the taxpayer (1) after Sept. 10, 2001, and before Sept. 11, 2004 (but only if there was no written binding contract in effect before Sept. 11, 2001, for the acquisition of the property), or (2) under a written binding contract entered into after Sept. 10, 2001, and before Sept. 11, 2004. ... The original use of the property (that is, the first use to which the property is put) commences with the taxpayer after Sept. 10, 2001. In other words, the additional first-year depreciation allowance is only for new property. However, otherwise qualifying improvements made after Sept. 10, 2001, and before Sept. 11, 2004, to property that isn't original-use property qualify for the additional first-year depreciation allowance. ... The property is placed in service by the taxpayer before 2005. The additional first-year depreciation allowance applies to qualified property unless the taxpayer “elects out.” The election out may be made for any tax year for any class of property. The Joint Committee on Taxation's Technical Explanation of the Act makes it clear that if Code Sec. 179 expensing is claimed on qualified property, the amount expensed “comes off the top” before the additional 30% first-year depreciation allowance is computed. Then the taxpayer computes regular first-year depreciation (and depreciation for future years) with reference to the adjusted basis remaining after expensing and after the additional 30% first-year allowance. Increased first year depreciation dollar cap for luxury autos. The first-year depreciation dollar cap for a business auto that is qualified property (defined above) is increased by $4,600. The regular first-year depreciation allowance is capped at $3,060 for autos placed in service in 2001 or 2002, so under the Act the combined first-year allowance for a luxury auto that is qualified property is $7,660. Temporary increase in NOL carryback period. In general, a net operating loss (NOL) may be carried back two years and carried forward 20 years. The Act increases the two-year carryback period to five years for NOLs arising in tax years ending in 2001 or 2002. A taxpayer may irrevocably elect, in the manner prescribed by IRS, to forgo the five-year carryback period and instead carry the NOL back 2 years and forward 20 years. Deemed sale and repurchase election for 5-year capital gain. Gain from the sale or exchange of property held for more than 5 years and the holding period for which begins after Dec. 31, 2000, which would otherwise be taxed at a 20% rate will be taxed at an 18% rate. Under the deemed-sale-and-repurchase election, a noncorporate taxpayer (including a passthrough entity) may irrevocably elect to:
A loss resulting from the election is not allowed for any tax year. The Act makes two important technical corrections to the deemed sale-and-repurchase election (Act Sec. 414): (1) Under pre-Act law, gain resulting from the election is recognized notwithstanding any provision of the '86 Code. The Act changes this rule to provide that gain resulting from the election is included in gross income notwithstanding any provision of the '86 Code. Thus, if the deemed sale-and-repurchase election is made for an appreciated-in-value principal residence, the Code Sec. 121 home-sale exclusion does not apply. (2) The Act provides that making the deemed sale-and-repurchase election for a passive activity won't free up passive losses suspended under Code Sec. 469(g)(1)(A). This change puts an end to what had been suggested as a planning strategy for taxpayers who have large suspended passive losses and were looking for a way to offset them against ordinary income. Both changes are retroactively effective as if included in the '97 TRA. Please call us if you have any questions about the application of these tax saving opportunities to your specific situation.
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