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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.)




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