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.
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
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
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).
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
"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.
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
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.