Job Creation and Worker Assistance Act of 2002

Due to the sluggish economy, lawmakers have recently enacted legislation which may help to reduce tax liabilities for businesses. The "Job Creation and Worker Assistance Act of 2002," containing business tax benefits, was signed into law by President Bush on March 9, 2002.

30% Bonus Depreciation

One provision of the "Job Creation and Worker Assistance Act of 2002" which impacts all companies, but is very advantageous to equipment intensive contractors, allows taxpayers to take an additional bonus depreciation deduction on certain types of fixed asset purchases. Specifically, it allows an additional 30 percent depreciation deduction in the year the property is placed into service. This bonus depreciation is calculated before computing the first year depreciation deduction and applies to most types of business property purchased between Sept. 11, 2001, and Sept. 10, 2004, and placed in service before January 1, 2005.

For example, Company A purchases an excavator for $90,000 on January 30, 2002. Under the former law, Company A would depreciate the excavator over five years using the 200% declining balance method and the half year convention, resulting in depreciation of $18,000. Under the new provisions, Company A would be able to take advantage of the additional 30% first year bonus depreciation deduction. Rather than deducting $18,000 of depreciation, the company would deduct $39,600 of depreciation. This amount consists of $27,000 of bonus depreciation (30% x $90,000) and $12,600 of regular depreciation (5 year, 200% declining balance on the remaining basis after subtracting the $27,000 of additional bonus depreciation).

Furthermore, if the company can elect the IRS Code Section 179 deduction, this amount is computed before the additional 30% first year depreciation. In this example, Company A could take $24,000 of Code Section 179 expense and $29,040 of depreciation expense, resulting in a deduction equivalent to 59% of the asset value the first year the asset is placed in service.

A significant caveat to the bonus depreciation provision is that, due to Congress' intention to boost the economy, the property purchased must be original use property (i.e. new property). Therefore, used equipment does not qualify. As a result, it may benefit a contractor to purchase new equipment.

Because the bonus depreciation provision was made retroactive to Sept. 11, 2001, many companies that acquired qualifying equipment in 2001 are eligible to claim additional deductions on their 2001 tax returns. Taxpayers who already filed their returns may take advantage of this by filing an amended return for 2001.

Net Operating Losses

The "Job Creation and Worker Assistance Act of 2002" also provides benefits to companies with net operating losses (NOLs). Due to the change in the Northwest economy, many contractors which enjoyed profitable years in the middle to late 1990's may suffer a loss in 2001 or 2002. The previous tax law generally required NOLs to be carried back two years and forward twenty years. However, the new law extends the NOL carryback period to five years for tax years ending in 2001 and 2002. As under prior law, a taxpayer may elect to waive the carryback period.

For example, Company B reported net taxable income in prior years, but generated a $100,000 NOL in 2001. Since Company B had taxable income in prior years, it may elect to carry back the NOL to 1996. If there is insufficient income to absorb the NOL carryback, any remaining NOL may be carried forward to 1997 and future years until fully absorbed. Consequently, Company B will have the opportunity to be immediately refunded prior year taxes paid.

Recent changes in tax laws enacted by Congress can be a windfall for many contractors. Equipment intensive contractors can drastically reduce their taxable income through additional depreciation deductions. Furthermore, contractors can now recoup prior years' taxes faster than in previous years due to the extension of the net operating loss carryback period. Proper planning and a thorough understanding of the "Job Creation and Worker Assistance Act of 2002" will ensure the most effective application of this law.

Michael Schmidt, CPA, is a manager with Berntson Porter & Company, PLLC in Bellevue WA, a full service provider of certified public accounting and value added financial services. Mike specializes in the construction industry. He can be reached at 425.454.7990 or mschmidt@bpcpa.com.