Volume 37, Issue 11, November 2002
Tax Season Approaches
How New Tax Changes May Affect Your Business
by Melvin H. Daskal
Editor’s Note: The following contains excerpts of an article printed originally in “Financial Fax,” a publication of the Specialty Equipment Market Association, reprinted with permission.
The new tax bill, “The Job Creation and Worker Assistance Act of 2002,” became law on March 9, 2002. While it contains two major tax breaks that will help some businesses, as usual, Congress, paid no attention to the continually increasing complexity of our tax laws. This act just added another layer of complication to the already toppling national tax structure. For example, Commerce Clearing House published a 324-page book—just about this latest tax law.
Special Depreciation Allowance (New Bonus Depreciation)—General Rule
This is the big one! Additional first-year (bonus) depreciation of 30 percent is allowed on the adjusted basis of qualified property. “Qualified property” is new, depreciable property with a recovery period of 20 years or less (plus qualified leasehold improvements) that is acquired after September 10, 2001, and before September 11, 2004. “Adjusted basis” generally cost less than any Section 179-bonus depreciation (currently up to $24,000), which, if claimed, must be subtracted first (or it can be waived).
Tax Tips: (1) This new 30-percent special depreciation allowance is allowable for both regular and alternative minimum tax purposes. (2) There is no limit on the amount of property that can qualify for this extra 30-percent depreciation ... as long as it’s “qualified property,” it’s eligible.
(3) Even if the qualifying property is purchased and put into service on the last day of the year, the new bonus depreciation can be claimed. (4) Computer software is also considered qualified property. (5) In many cases amended 2001 tax returns will need to be filed to claim the new 30-percent bonus depreciation when such assets were acquired after September 10, 2001, and the applicable tax returns have already been filed.
Special Tax Tip: To maximize both the 30-percent bonus depreciation and the Section 179 depreciation deduction, you should usually claim the Section 179 deduction on property acquired prior to September 11, 2001. Then you can claim the 30-percent deduction on the full value of different property acquired after September 10, 2001. Otherwise, if you claim both deductions on the same property, the Section 179 deduction will be applied first (and will be subtracted from the tax basis of the asset), therefore reducing the amount of the 30-percent depreciation, which is then calculated on the remaining net balance of the property.
Net Operating Losses
Taxpayers can generally carry back net operating losses (NOLs) for two years. For tax years ending in 2001 and 2002 only, the NOLs can now be carried back five years. In addition, three-year NOLs of individuals (such as casualty losses) are also covered by these new rules. Further, NOL deductions or carry-forwards arising from those two tax years can now offset 100 percent of taxpayer alternative minimum taxable.
Taxpayers can make a special election to forgo the special five-year carry-back period. Once made, the election is irrevocable and the previous rules of two-year or three-year carry-backs apply. Of course, the taxpayer can then, if he chooses, make the separate election to forgo the entire carry-back period, as in the past.
Remember the old “audits from hell?” They were examinations under the Taxpayer Compliance Measure-ment Program (TCMP), beginning with 1988 tax returns. They were so hated by taxpayers that even Congress got in the act and the IRS eventually terminated TCMPs in 1994. Well … they’re baaack!
The IRS is desperate to obtain current information about taxpayer conformity with the tax laws. It wants to improve its audit selection process so it audits few tax returns that result in a “no-change,” which the IRS strongly feels is a waste of its audit facilities. This time the IRS is calling the program the National Research Program (NRP) to “survey taxpayer compliance.”
The first phase alone will involve $50,000 audits of individual tax returns; selection began in September 2002. Later, the NRP will expand to corporate and other taxes and also even more individual NRP audits. They claim these audits will be less intrusive than the old TCMPs and still provide “reliable data to refine the IRS’s selection process.” We shall see.
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