Businesses Need to Act Fast to Take Advantage of Tax Breaks for 2001
The following article is provided courtesy of CCH, Inc.
Small Businesses Stand to Gain From Job Creation Act
After months of political battling and partisan gridlock, Congress finally got their act together and, in a flash, passed an economic stimulus tax package. Whether enacted for political reasons or as a belated effort to help the economy, the $42.9 billion Job Creation and Worker Assistance Act of 2002 offers a significant number of tax breaks to small businesses according to CCH INCORPORATED (CCH), a leading provider of tax law information and software.
"Small business owners should see this as an opportunity to take advantage of any tax breaks they can," said Paul Gada, JD, CCH small business analyst and editor of CCH Business Owner’s Toolkit™ Tax Guide 2002.
"The federal government has been giving a lot of tax breaks within the last year while at the same time increasing its spending on such things as homeland security and the military, meaning that tax breaks available today may not be available a few years down the road."
Business Provisions Affecting 2001 Returns
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 carryback period from two to five years.
"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 qualify, but have already filed your 2001 federal tax return, don't panic," said Gada. "You can still get the benefit of the tax breaks by filing an amended return."
Under the depreciation bonus provision, businesses are now entitled to an additional first-year depreciation deduction equal to 30 percent of the value of certain types of qualified property, which includes:
- Property with a recovery period of 20 years or less, meaning almost all office and most manufacturing equipment;
- Water utility property, generally a benefit to businesses using equipment for the gathering, treatment or commercial distribution of water;
- Most types of computer software (except software that is considered an intangible asset that has to be amortized rather than depreciated);
- Qualified leasehold improvements to nonresidential real property (except enlargement of the building, installing an elevator or escalator, improvements to common areas or improvements to the building's structural framework).
While a broad range of property is eligible for the extra depreciation deduction, the catch is that the property must be acquired after September 10, 2001 and before September 11, 2004. Also, the property must be placed in service on or after September 11, 2001 and before January 1, 2005.
For small businesses, there’s an added bonus: 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. For example, if your business purchased and started using a piece of equipment with an adjusted basis of $50,000 at the end of 2001, you would first take a depreciation bonus of $15,000 (30 percent of $50,000). Then, you could apply the $24,000 expense election (assuming you haven't already used it up for the year). The end result is that you'd be able to deduct a total of $39,000 or 76 percent of the cost of the equipment in very first year. If you are in the 27.5-percent tax bracket, this translates into tax savings of $10,725 that helps defray the $50,000 you had to pay for the equipment.
Small businesses also stand to benefit from the changes in expensing limits for automobiles. For 2001, the depreciation cap for vehicles under 6,000 pounds was $3,060. The Act now allows businesses to take an extra $4,600 in the year the vehicle is placed in service if both the purchase and business use started after September 10, 2001.
Under net operating loss tax provisions, 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, and can be used to reduce alternative minimum taxable income liability up to 100 percent.
However, Gada cautions, a qualifying business must elect out of this special carryback treatment or else be bound by it.
"If you have a net operating loss for 2001 but it would be more advantageous for your business to carry it back just two years rather than five, you need to make the IRS aware of this or the loss will automatically be carried backed for five years," said Gada. "Adding to the last-minute confusion, the Act leaves it up to the IRS to establish the opt-out procedures. Hopefully, the agency will have some guidance by the April 15 filing deadline."
Tax Changes for 2002 and Beyond
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. According to Gada there are three provisions most likely to affect small businesses within the zone:
- The maximum expensing election limit is increased to $35,000 (instead of $24,000).
- An additional 30-percent depreciation deduction is added to the normal first-year depreciation deduction. (The first two provisions may also affect your 2001 return because they technically apply to business property purchased and placed in service in the Liberty Zone after September 10, 2001.)
- The Work Opportunity Tax Credit, offering a credit to employers of up to $2,400 per qualifying employee, is extended to individuals substantially performing all their services in the recovery zone for a business in the zone or those working in New York City for a business that had to relocate out of the zone due to the terrorist attacks.
Extension of Tax Credits and Provisions
The legislation also breathes new life into a number of expiring tax credits and provisions. Among those most likely to impact small businesses are:
- Work opportunity credit – The incentive for employers to hire persons from certain disadvantaged groups has been extended through 2003. Not only is this a break for potential employees in disadvantaged groups, according to Gada, employers can also continue to get a reward (up to $2,400 per employee) for hiring these individuals.
- Welfare-to-work credit – In a similar vein, the credit for hiring qualified family assistance recipients also has been extended through 2003. For small businesses 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.
- Indian employment credit – This credit has been extended through 2004, which is helpful for businesses located on Indian reservations because it allows more opportunity to claim this special tax credit (up to $20,000 per qualified employee).
- Medical Savings Accounts – The availability of Archer Medical Savings Accounts (MSAs) has again been extended through 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.
- Credit for qualified electric vehicles – Taxpayers can now take the full amount of this credit (10 percent of its cost up to $4,000) through 2003. The credit begins to phase out in 2004 and is eliminated entirely in 2007.
- Deduction for clean fuel vehicles – The deduction from a business owner's gross income for using vehicles powered by cleaner-burning fuels also has been extended through 2003. The deduction begins to phase out in 2004 and is eliminated completely in 2007.
About CCH Business Owner’s Toolkit
Instant access to small business-specific tax information and tax changes is available via CCH Business Owner’s Toolkit (toolkit.cch.com). Also available is the CCH Business Owner’s Toolkit Tax Guide 2002 – an easy-to-understand tax resource available for purchase over the Internet at onlinestore.cch.com/toolkit as well as in bookstores nationwide. Buyers of the book also are able to file one federal and one state return at no charge using CHH CompleteTax™, online tax prep and filing service.
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