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New Stimulus Law Offers Business Breaks
The House had passed a bill three other times during the fall and winter months but the Senate refused to support the prior versions. The Act includes a number of tax breaks aimed at spurring business investment and extends unemployment compensation benefits for individuals who were laid off shortly after the Sept. 11 attack and the resulting economic downturn.
Several of the tax breaks will have a retroactive impact on businesses. The major changes affecting businesses are: “bonus” depreciation allowances, expansion of tax operating loss carryback rules, and the extension of certain employment tax credits.
One does not need to look far to realize that manufacturing businesses have been hit hard by the economic slowdown, which was compounded by the Sept. 11 attacks. The all-too-frequent announcements of additional employee layoffs by local companies are evidence of the downturn in the manufacturing sector. In an attempt to encourage equipment spending and provide tax incentives to purchasers, the Act provides a depreciation “bonus” for new equipment purchased after Sept. 10, 2001. The provision allows taxpayers to receive a “bonus” deduction of 30 percent of the cost of eligible property. In addition, the remaining 70 percent of the cost is depreciated beginning in the same year.
For example, a taxpayer who purchases an eligible piece of machinery for $100,000 will receive a first-year deduction equal to $40,003, computed as $30,000 “bonus” depreciation plus normal depreciation on the $70,000 remaining cost.
The “bonus” depreciation is available for property with a tax-depreciable life of 20 years or less, computer software, and certain leasehold improvements. Thus, most manufacturing equipment, office furniture, computers and vehicles would be considered eligible property. In addition, the property must be new property; used property is not eligible for the bonus depreciation. The depreciation “bonus” is available for property acquired after Sept. 10, 2001, and before Sept. 11, 2004. Thus, there is a three-year window to take advantage of this tax-saving opportunity.
Because the economy has been soft for over a year and may continue to be so for some time to come, businesses may be experiencing tax operating losses. This may be particularly true due to the accelerated tax deductions created by the “bonus” depreciation discussed above.
The Act includes several provisions that will allow companies greater opportunities to claim refunds of taxes paid in prior years. The Act allows taxpayers to offset a 2001 or 2002 tax operating loss against taxable income earned in the five preceding tax years. This provision is a change from the normal rule that only allows for an offset for the previous two years.
For example, if a business had taxable income in 1997, the Act allows a business that has a tax operating loss in 2002 to carry that loss back to claim a refund of taxes paid in 1997. Prior to the change made by the Act, the loss would only have been able to be carried back to 2000, and because of the economic conditions in 2000, it is possible no tax would have been paid in that year.
Apparently, Congress recognized that many businesses might have paid little or no tax in the year 2000 because of economic conditions. By allowing an additional three-year carryback to more prosperous economic times, the Act increases the opportunity for businesses to realize larger tax refunds. In addition, Congress changed a provision in the Alternative Minimum Tax (AMT) rules that may have prevented many taxpayers from being able to reclaim full refunds of taxes paid in the earlier years.
The Act also extends certain employment credits that were expiring on Dec. 31, 2001. Many employers may not be aware of credits available for the hiring of individuals within certain targeted groups. The Work Opportunity Tax Credit allows a tax credit for a portion of the wages paid to eight classes of qualifying individuals who may have difficulty getting employment. The Welfare to Work Tax Credit provides a tax credit for a portion of the wages paid to certain long-term family assistance recipients. Both of these credits have been extended through Dec. 31, 2003.
Mark A. Walkotten is a tax partner in the Grand Rapids office of Crowe, Chizek and Co. LLP, a full service business consulting firm. He specializes in the provision of corporate tax consulting services for middle market manufacturing companies.