Michael Goldman & Associates, L.L.C. - Consulting & CPA Services

March 2002

Small Businesses and Self-Employed Individuals Stand to Gain from Job Creation Act

On March 9, 2002 , Congress passed an economic stimulus tax package.  The Job Creation and Worker Assistance Act of 2002 offers a significant number of tax breaks to small businesses.  This new law includes provisions that are retroactive to September 2001.

New First Year Bonus Depreciation Break

Probably the biggest tax break directly affecting businesses are the creation of a temporary 30-percent depreciation bonus.

Under the depreciation bonus provision, businesses are now entitled to an additional first-year depreciation deduction equal to 30 percent of the value of certain types of qualified property, which includes:

•  Property with a recovery period of 20 years or less, meaning almost all office and most manufacturing equipment;

• Most types of computer software (except software that is considered an intangible asset that has to be amortized rather than depreciated);

• Costs related to adding features to leased nonresidential real property (except enlargement of the building, installing an elevator or escalator, improvements to common areas or improvements to the building's structural framework).

While a broad range of property is eligible for the extra depreciation deduction, the catch is that the property must be acquired after September 10, 2001 and before September 11, 2004 . The property must be placed in service on or after September 11, 2001 and before January 1, 2005 .   One last caveat – the property must be new, not used, reconditioned, or rebuilt.

For small businesses, there’s an added bonus: the extra depreciation deduction can be used in addition to the small business expensing election (section 179 deduction), which allows a deduction of up to $24,000 for assets purchased and placed in service in 2001 or 2002. For example, if your business purchased and started using a computer system that cost $100,000 at the end of 2001, you would be entitled to $57,440 of write-offs in 2001, calculated as the sum of the following:

• The $24,000 allowed under section 179

• The 30% bonus depreciation of $22,800 on the remaining $76,000  ($100,000 cost - $24,000 sec 179 deduction)

• The normal 20% depreciation of $10,640 on the remaining $53,200 ($76,000 - $22,800 bonus depreciation)

Additional Benefits for New Business Vehicles

Small businesses also stand to benefit from the changes in expensing limits for automobiles. For 2001, the depreciation cap for vehicles less than 6,000 pounds was $3,060. The Act now allows businesses to take an extra 30% depreciation up to $4,600 in the year the vehicle is placed in service if both the purchase and business use started after September 10, 2001 .   More than 50% of the car’s usage must be for business to qualify for this break, and if you use the car for less than 100% business than the bonus depreciation is proportionately reduced.

If your small business buys a new “heavy” vehicle (more than 6,000 pounds), you can use the entire $24,000 section 179 deduction and the 30% bonus depreciation on the remaining cost, without worrying about the $4,600 limitation.  The savings for buying a new “heavy” vehicle for business usage can be substantial.

Extended Carry-Back Period for Tax Losses

Under net operating loss tax provisions, a business can generally carry back a Net Operating Loss two years (three years when casualty losses are involved). The Job Creation Act temporarily extends the carry-back period to five years for losses arising only in tax years 2001 and 2002.  This may allow a small business to obtain a refund of previously paid taxes.  A qualifying business must elect out of this special carry-back treatment or else be bound by it.

Extension of Medical Savings Accounts

The availability of Archer Medical Savings Accounts (MSAs) has again been extended through 2002. Employees of small businesses (50 or fewer employees) and self-employed individuals can continue to set up Archer MSAs to pay health care expenses, provided the accounts are used in connection with high-deductible health insurance.

© Michael Goldman 2002

For more information, please go to www.michaelgoldman.com 

Editorial material in these newsletters is intended to be informative, and should not be construed as advice. For advice on any specific matter, please consult your financial or legal adviser.

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Last modified: March 31, 2007