Job Creation and Worker Assistance Act of 2002

March 12, 2002

There is a new law on the books carrying a number of important tax changes. The "Job Creation and Worker Assistance Act of 2002", signed into law by the President on March 9, mostly benefits businesses and investors. What is more, several changes are retroactively effective and may affect returns that have already been filed as well as those that are about to be filed for tax year 2001. There are several changes affecting individuals as well.

Tax breaks for business and investors include the following changes:

  • An additional 30% first-year depreciation write-off for most types of new non-realty property acquired after September 10, 2001 and before September 11, 2004. For example, if a business or practice bought a new qualifying $10,000 machine normally depreciated over five years, the first year write-off under the new law is $4,400. Under prior law, the maximum first year write-off is only $2,000. The extra 30% first year write-off also applies to certain types of interior improvements to leased non-residential realty (such as an office building or factory).

  • The first year depreciation dollar cap on new luxury autos bought for business purposes is boosted by $4,600, effective for autos acquired after September 10, 2001 and before September 11, 2004. For qualifying autos bought in 2001 or 2002, that means a maximum first year write-off of $7,660 (regular $3,060 first year allowance plus $4,600). This means a larger up-front deduction for those who buy new autos for use in their business or practice.

  • The net operating loss (NOL) carryback period is increased from two or three years to five years, for NOLs arising in tax years ending in 2001 or 2002. This change could create additional refunds for businesses suffering losses. Related changes help businesses with NOLs avoid alternative minimum tax problems.

  • Many tax breaks that expired at the end of 2001 are retroactively reinstated and extended for two years. These include the work opportunity tax credit and the welfare-to-work credit.

Tax changes for individuals include the following provisions:

  • Under the new law, for 2002 and 2003, you will be able to use personal non-refundable credits (such as education credits or child credits) to offset both your regular tax liability and your alternative minimum tax liability.

  • A crackdown on S corporation shareholders prevents them from increasing the basis of their stock in the entity (and thereby being able to deduct suspended losses) by debt that is forgiven and excluded from the corporation's income when the entity is bankrupt or insolvent.

  • A number of changes, mostly favorable, deal with the enhanced retirement savings opportunities created by the 2001 tax law. For example, a change clarifies that a person can make "catch-up" contributions any time during the year he or she turns age 50, not just after the calendar date he or she attains age 50.

  • For 2002 and 2003, there is a new up-to-$250 deduction for educators below the college level who spend their own money on books and other materials they use in the classroom. The new deduction is available to itemizers and non-itemizers.

Please keep in mind that we have described only the highlights of the most important changes in the new law. Please give us a call for more details if you believe you may be affected.