On March 9th of 2002, the "Job Creation and Worker Assistance Act" was signed into law by President Bush.  The new law doesn't contain many benefits for individual taxpayers, but it does include a 13 week extension of unemployment benefits and some relief measures aimed at businesses.

The Congressional Joint Committee on Taxation estimated the cost of the new law at $42 billion over 10 years.  We will summarize some of the major provisions that we feel may directly impact some of our clients in this article:

High School and Elementary Teachers

Teachers, counselors and principals on the high school and elementary school level will be allowed to deduct up to $250 of supplies that they purchase for their classroom during each of 2002 and 2003 without having to itemize deductions.  Eligible expenses include books, supplies, equipment, and computer hardware and software. There is currently no provision for this deduction after 2003.

Bonus Depreciation

For equipment purchased between September 11, 2001 and September 10, 2004, businesses under the new law will be allowed to write off an extra 30 percent of the cost of new equipment purchases in the year of acquisition.  This provision is obviously going to cause some problems for businesses that made equipment purchases late in 2001 and have already filed their tax return for that year.  Many businesses may want to file an amended return for 2001.

This 30 percent bonus depreciation must be deducted from the cost of the asset before depreciating the asset over its useful life.  As an example, if your company acquired $100,000 of equipment during 2002, you would be allowed to take bonus depreciation of $30,000 ($100,000 x 30%) and the remaining $70,000 basis in the equipment would be deducted beginning in 2002 and in later years under the standard depreciation rules.

A few of the rules governing what assets are eligible for the bonus depreciation are as follows:

1) It must be MACRS-eligible property with a recovery period of 20 years or less;

2) It is water utility property [as defined in §168(e)(5)];

3) It is computer software other than software that must be amortized over 15 years under §197;

4) It is qualified leasehold improvement property (generally a non-structural, non-expansion improvement to an interior portion of an existing nonresidential building, provided certain requirements are met).

5) There was no written binding contract in effect before September 11, 2001, for the acquisition of the property;

6) The original use of the property commences with the taxpayer after September 10, 2001 (basically, this means that the bonus depreciation applies only to new property).

Luxury Autos

The Act also increased the regular first-year depreciation allowance on autos placed in service in 2001 and 2002 from $3,060 to $7,660.  The limits on depreciation in later years, however is still limited to $4,900 in year two, $2,950 in year three and $1,775 annually thereafter.  

Alternative Minimum Tax

A provision of the 2002 Act now protects most personal tax credits, including the dependent-care credit and the Hope and Lifetime college tuition credits, from being reduced by the alternative minimum tax through 2003. 

Net Operating Losses

The Act temporarily extends the carryback period for net operating losses arising in 2001 and 2002 from two to five years in order to help businesses affected by the terrorist attacks.

"Liberty Zone" Tax Relief

Congress has created what they're calling a "Liberty Zone" in lower Manhattan located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway).  The purpose of the zone is to help revitalize the area that was devastated by the terrorist attacks.

Among the benefits are an expanded Section 179 deduction (to $59,000) plus favorable depreciation rates and bonus depreciation for eligible nonresidential or residential realty that is acquired to replace or rehabilitate realty damaged or destroyed by the terrorist attacks.  Straight line depreciation can be taken over 5 years for qualified leasehold improvement property and Zone acquisitions are also eligible for the 30% bonus depreciation.  (The bonus depreciation discussed earlier does not extend to real property with a depreciable life greater than 20 years).

For businesses employing an average of 200 people or less that are located in the Zone or forced to relocate elsewhere in the City, the Act has created a new targeted group of work opportunity credit eligible individuals.  The maximum credit is $2,400 (40% of up to $6,000 of qualified wages) per qualified employee per year in 2002 and 2003.

Medical Savings Accounts

The Medical Savings Account (MSA) pilot program was originally scheduled to expire at the end of 2002 and this Act extends it to the end of 2003.  Self-employed workers and employees of small businesses (less than 50 employees) are currently allowed to set up tax deductible MSAs to pay out-of-pocket medical bills that fall below the policy deductible.   Unused funds in an MSA can be carried over from year to year.

Other Tax Credit Extensions

Work Opportunity Tax and Welfare-To-Work Credits - Extended to wages paid or incurred to a qualified individual who begins work before 2004.  The credits previously applied to work begun before 2002.

Credit for production of electricity from wind, closed-loop biomass and poultry litter extended to qualified facilities placed in service prior to 2004 instead of 2002.

The 10% electric vehicle tax credit is now phased out over 2004 to 2006 instead of 2002 and 2003.

Technical Corrections

"Catch-Up" Retirement Plan Contributions - This Act amends the 2001 Tax Relief Act provision which allows workers age 50 and over to make contributions beyond the normal limits to 401(k)s and similar employer retirement plans so that individuals can begin making "catch-up" contributions at the beginning of the year they turn 50 instead of waiting for their actual birthday.

SEP Plans - A technical mistake in the 2001 Act has been corrected to reflect Congress' intent to increase the annual contribution limit to Simplified Employee Pension plans (SEPs) to 25% of compensation, up to a maximum deposit of $40,000.

Adoption Credit - The 2001 Tax Relief Act raised the adoption credit from $5,000 to $10,000 per child beginning in 2002, and this Act clarifies how much of adoption expenses incurred prior to a final 2002 or later adoption are eligible for the adoption credit.

Education Breaks - This Act clarifies another provision of the 2001 act concerning the Hope or Lifetime college tuition credit.  Beginning in 2002, families are no longer automatically disqualified from claiming the Hope or Lifetime college tuition credit for a student in the same year that money is withdrawn from the student's education savings account (education IRAs) so long as the education savings withdrawals are not used for the same expenses for which the credits are claimed.

There are several other minor provisions of the 2002 Stimulus Act that we have not covered here and more details to many of the provisions listed above, so please feel free to contact our office if you need further clarification.