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SEPTEMBER 11 TAX BREAKS
DESIGNED TO STIMULATE BUSINESS

Written By: Alan A. Lips, C.P.A.
Published By:                                             
Date: __________ ___, 2002

The horrific events on September 11, 2001 not only stunned the world but also paralyzed the American economy. Reacting to the potential for a nationwide crisis, Congress passed and President Bush signed into law the “JobCreation and Worker Assistance Act of 2002,” an economic stimulus package containing two substantial tax breaks for businesses. These initiatives are designed to benefit small and large companies and to boost the U.S. economy by stimulating spending.

The first provision of the package is a special depreciation allowance for qualifying depreciable property. Businesses are entitled to an additional first year depreciation deduction equal to 30% of the adjusted basis of new assets acquired after September 10, 2001. The additional depreciation deduction for the first year reduces the depreciable basis of the property for purposes of calculating future depreciation. For those of you paid the alternative minimum tax in the past, rest assured that the additional 30% first year depreciation deduction is allowed for both regular tax and alternative minimum tax purposes.

Your company might have been among the countless businesses that held off on making capital investments because you and your managers thought the economy was on a major downslide. It’s not uncommon for business people to be slightly fearful of buying new equipment since they have to come up cash out of pocket and do not get an immediate tax deduction for the whole cost. Either way, with a questionable economy and tight cash flow, investing in new assets was probably not a priority.

Now is the perfect opportunity to invest in that new equipment since businesses are entitled to the regular depreciation for the first year plus a bonus of 30% additional depreciation in the first year. On the average 5 or 7-year qualifying asset, you can now expense up to 45% of the asset cost in the year of acquisition.

For example, if a medium-sized company spent $100,000 on new computers and other office equipment this year, the company would see an enormous tax break. Assuming the purchase was after 9/11/01, the company was unable to use Section179 (election to expense up to $24,000 in the year of acquisition) and that this equipment is 7-year qualifying depreciable property, total first year depreciation would be $40,003 ({$100,000 * 30%} + {$70,000 *14.29%}).

As another example, if a construction company spent $500,000 on new construction equipment, assuming the same assumptions above, the math is the same. The total first year depreciation would be $200,015 ({$500,000*30%} + {$350,000*14.29%}).

Once business owners find out about this tax incentive, the reaction whether it’s computers, office equipment, heavy machinery, manufacturing equipment, etc. will be strong and encouraging. But it is critical to determine that the purchase under consideration be qualifying property in order to benefit from this new tax benefit. Since September 11, 2001,it has already motivated companies that have the current need for new equipment and the liquidity to make those purchases.

You can acquire depreciable property for the extra 30% depreciation through 9/11/2004.

The package increased the dollar limit on the amount of first-year depreciation that may be claimed for a business automobile. It has been raised from $3,060to $7,660 for autos placed in service after September 10, 2001, and before2003.

There is even good news for businesses with losses. The second provision of the package allows net operating losses arising in taxable years ending in 2001 and 2002 to be carried back 5 years instead of the usual 2 or 3 years. "Carrying back" a net operating loss means that you refigure and reduce the prior year's taxable income to the extent of the loss incurred in 2001 or 2002. A net operating loss is the excess of a taxpayer’s allowable deductions over the gross income. This way, you may be entitled to a refund, partially or completely, of taxes you paid in those earlier years. This is exciting considering that many businesses had substantial profits in the last five years, lost money in 2001 and are continuing to lose money in 2002.