|
New 2002
Tax Act Brings Immediate Impact
By Brad Graves, Partner, Haskell & White,
LLP
On March 8, President Bush signed The Job
Creation and Worker Assistance Act of 2002. The Bill
had overwhelming bipartisan support, passing easily in both the
House and Senate. In addition to extending unemployment benefits,
creating incentives for New York City, and adding technical corrections,
the new legislation contains a few major tax changes for businesses.
With April 15 just around the corner, it is important for taxpayers
to note that some of these changes are effective for 2001 and may
affect tax returns already filed or in process. Besides the immediate
impact, it is important to be aware of these changes as you move
further into your tax planning for 2002. At this time, California
has not adopted the federal changes.
Additional Depreciation Deductions
Qualified property acquired
on or after September 11, 2001, and before September 11, 2004, will
be eligible for an additional first-year depreciation deduction
equal to 30 percent of the adjusted basis. For example, a $100,000
qualifying asset with a 5-year recovery period would generally produce
a $20,000 first-year depreciation deduction under the prior rules.
Under the 2002 Tax Act, that same asset could generate up to a $44,000
depreciation deduction.
Qualified property is new property (i.e.,
original use of property commences with taxpayer) that is (1) property
with a recovery period of 20 years or less, (2) certain software,
(3) certain water utility property, or (4) qualified leasehold improvements.
Qualified leasehold improvements are defined as improvements, made
pursuant to a lease or sublease, to an interior portion of a building
that is nonresidential real property. Leasehold improvements otherwise
meeting this definition, but made within 3 years of the date the
building was first placed in service, are excluded from the definition
of qualified leasehold improvements.
Another change in the depreciation rules is
in the area of luxury automobiles. The limitation on the amount
of depreciation allowable for a luxury auto in the first year is
increased by $4,600, from $2,560 to $7,160. This change will be
effective for automobiles placed in service after September 10,
2001.
Net Operating Loss Carryback
Prior to the 2002 Tax Act, net
operating losses could be carried back two years and then carried
forward 20 years to offset taxable income in such years. The new
provisions allow taxpayers a five-year carryback period for net
operating losses incurred in 2001 and 2002. Taxpayers may elect
to forgo the five-year carryback period and default to the general
two-year carryback period or forego carrying back the loss altogether.
Limitation on Use of Non-Accrual Experience
Method
Accrual method taxpayers are
not required to recognize income from the performance of services
which, on the basis of experience, will not be collected (the "non-accrual
experience method"). The 2002 Tax Act limits the use of the
non-accrual experience method to amounts received for the performance
of qualified services and for services provided by certain small
businesses. Qualified services are services in the fields of health,
law, engineering, architecture, accounting, actuarial science, performing
arts or consulting. Businesses with average annual gross receipts
of $5 million or less may continue to elect and utilize this method
even for non-qualified services. Certain related parties are aggregated
for purposes of the $5 million exception.
Taxpayers should ensure that these new provisions
are addressed in the preparation of their 2001 tax returns and in
their 2002 tax planning. In addition to these welcome changes, some
in Washington believe we may not have seen the last of the tax cuts
for this year. While it is clear that there is significant support
on Capital Hill for further tax cuts, it is anyone’s guess
as to probability and timing.
(Brad Graves is a partner with Haskell
& White, LLP, based in Irvine, Calif. The firm is one of
the largest local accounting firms in Orange County. Brad specializes
in working with clients in the real estate, manufacturing, distribution,
and technology industries and can be reached at (949) 450-6200 or
bgraves@hwcpa.com.)
Email
this page to a friend / Tell
us your comments
|
