Job Creation and Worker Assistance Act of 2002.The depreciation and net operating loss operating loss The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit. Compare operating income. (NOL NOL - Never Offline ) provisions of the Job Creation and Worker Assistance Act of 2002 (Act), signed into law on March 9, 2002, will have a profound effect on corporate and individual regular and alternative minimum tax (AMT See vPro. ). Depreciation Taxpayers can claim additional depreciation deductions for new tangible personal property and software placed in service after Sept. 10, 2001 and before Sept. 11,2004. Essentially, a taxpayer can claim a Sec. 179 deduction (if applicable) first, followed by a 30% depreciation deduction (based on original cost); the taxpayer can then apply regular depreciation for that year based on the asset's reduced basis. Example: X, a small business (or an individual, partnership, C or S corporation) placed $100,000 of new computers in service on March 20, 2002. X did not place in service more than $200,000 of tangible personal property for that year. The following depreciation is permitted on the computers for 2002: In effect, 57.44% of the asset's cost is depreciable depreciable Of, relating to, or being a long-term tangible asset that is subject to depreciation. in the year the taxpayer placed the asset in service. AMT Effect The Sec. 179 and 30% depreciation deductions are also available for AMT purposes; there is no AMT adjustment for those two portions of depreciation. As for the 20% portion, the taxpayer must make a small AMT adjustment to the extent it uses the double-declining balance (DDB DDB - device independent bitmap ) method, instead of the AMT's 150% declining-balance (DB) method. In the example, the DDB method yields a $10,640 deduction; the DB method would yield a $7,980 deduction. The $2,660 difference is an AMT adjustment on the total $57,440 depreciation deduction. The Act also allows taxpayers to increase first-year Sec. 280F automobile depreciation by $4,600 if they place a vehicle in service between Sept. 11,2001 and Sept. 10, 2004. If a calendar-year taxpayer placed in service $1 million of furniture and fixtures in November 2001, it can take $300,000 depreciation (30% x $1 million) on its 2001 return; the basis will be $700,000. It can also take the normal 14.3% depreciation for the year placed in service, $100,000 ($700,000 x 0.143), for a total of $400,000 depreciation in the year placed in service (40%). For 2001, the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. suspended the mid-quarter convention for calendar-year companies. The same rules apply to computer software if Sec. 197 does not apply. Thus, if a company bought custom software that was not part of a trade or business acquisition for $500,000 in January 2002, it can deduct $150,000 ($500,000 x 30%) plus $116,667 ($350,000 x 0.33), for $266,667 total first-year depreciation (53.3%). NOLs The Act allows taxpayers to carry back NOLs arising in tax years ending in 2001 either two or five years. If five years ago the taxpayer was in a low tax bracket Tax Bracket The rate at which an individual is taxed due to a particular income level. Notes: Each income class is taxed at a different level. Generally, the more you make the more you are taxed. , it can elect to forgo a five-year carryback and use the existing two-year rule, or forgo the carryback entirely. However, the taxpayer has to use the same treatment for AMT purposes. The Act allows taxpayers to offset AMT NOLs arising in 2001 or 2002 against past years' alternative minimum taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. (AMTI AMTI Applied Marine Technology Inc AMTI Advanced Mechanical Technology Inc (Watertown, MA) AMTI Applied Marine Technology, Inc. AMTI Advanced Medical Technology Institute AMTI Automatic Moving Target Indicator ) at 100% (rather than the current 90%), eliminating AMT for many large and small businesses. Also, an AMT NOL applied to 2001 or 2002 fully offsets AMTI (rather than only 90% of it). This will significantly affect the tentative minimum tax computation and potentially generate significant business cashflow. Although the Act has a smaller revenue cost (approximately $50 billion over 10 years) than the Economic Growth and Tax Relief Reconciliation Act of 2001 ($1.3 trillion), it will have a much greater effect and be more pro-business.
Total 2002
depreciation
Original cost $100,000
Less: Sec. 179 24,000 $24,000
Adjusted basis $ 76,000
Less: 30% additional
depreciation 22.800 22,800
Adjusted basis 53,200
Normal 20% MACRS
depreciation 10,640 10,640
Adjusted basis
for 2003 $ 42,560 $57,440
Editor's note Editor's Note (foaled in 1993 in Kentucky) is an American thoroughbred Stallion racehorse. He was sired by 1992 U.S. Champion 2 YO Colt Forty Niner, who in turn was a son of Champion sire Mr. Prospector and out of the mare, Beware Of The Cat. Trained by D. : Dr. Karlinsky is a member of the AICPA AICPA See American Institute of Certified Public Accountants (AICPA). Tax Division's S Corporation Taxation Technical Resource Panel. |
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