The terrorist attack on the United States of September 11, 2001 and the resulting economic downturn led to calls for Congress to pass an economic stimulus bill -- and, indeed, Congress finally passed the Job Creation and Worker Assistance Act of 2002 (the "Job Creation Act"), which was signed by President Bush on March 9, 2002. The final bill passed both houses of Congress by overwhelming margins (417-3 in the House, 85-9 in the Senate), thanks to provisions which addressed the preferences of both Democrats and Republicans.
The Job Creation Act is expected to cost the Federal government approximately $42 billion over the next ten years. Oddly enough, though, the cost of the Job Creation Act in the first five years is estimated at $94 billion. The discrepancy can be explained by the fact that taxpayers will be able to take certain depreciation deductions and use net operating losses earlier than they otherwise would, while reducing the deductions and losses available to the taxpayers in the sixth through tenth years.
Unlike, for example, the Economic Growth and Tax Relief Reconciliation Act of 2001 (the "2001 Tax Act"), the Job Creation Act directs its benefits more toward targeted categories of taxpayers rather than to the public at large. Still, if you fall into one of those categories, you need to know about the Job Creation Act. You may even find out that your 2001 taxes decreased after you filed your return.
In order to stimulate capital investment, the Job Creation Act provides for a 30% depreciation allowance for most types of depreciable property -- that is, the taxpayer can take depreciation equal to 30% of the property's basis in the year the property is placed in service. The remaining 70% of the property's basis is depreciated according to the schedule under which the property would otherwise be depreciated.
This depreciation allowance applies only to "qualified property." Qualified property must be acquired by the taxpayer after September 10, 2001, and before September 11, 2004 (or acquired by the taxpayer pursuant to a written binding contract entered into during that time period). If there was a written binding contract for the acquisition in effect before September 11, 2001, the property cannot be "qualified property."
If you acquired and placed "qualified property" in service in 2001, on or after September 11, but filed your 2001 income tax return without utilizing this tax break, you should file an amended 2001 return. The Internal Revenue Service has already published a revised Form 4562 (Depreciation and Amortization) with which you can calculate the appropriate deduction that applied to such qualified property.
Five-Year Net Operating Loss Carryback
In general, a taxpayer who incurs a net operating loss (typically a loss incurred in a trade or business) can carry that loss back to the two preceding tax years, then carry the loss forward up to 20 tax years. However, under the Job Creation Act, net operating losses incurred in tax years ending in 2001 and 2002 may be carried back up to five years (and then carried forward up to 20 years).
The extension of the net operating loss carryback period will likely benefit some taxpayers, but others may find it disadvantageous. For example, if a taxpayer was in a relatively low tax bracket during those earlier years, the taxpayer may prefer to use the net operating loss in a year when the taxpayer was, or will be, in a higher bracket so that the net operating loss deduction will be worth more to the taxpayer.
Fortunately, the taxpayer may elect to waive the extended carryback period. Such an election must be made by the due date (including extensions) for filing the taxpayer''s income tax return for the year in which the net operating loss was incurred. The election to waive the extended carryback period, once made, is irrevocable. Thus, one must really crunch the numbers and forecast future earnings to decide whether to elect the waiver.
Tax Incentives for New York City
The Job Creation Act also includes provisions specifically directed to assist New York City, particularly the area of lower Manhattan on or south of Canal Street, East Broadway, or Grand Street which has been named the "Liberty Zone" and which includes the site of the World Trade Center.
Specifically for the Liberty Zone, the Job Creation Act expands the definition of "qualified property" for the 30% depreciation allowance (discussed above) to include nonresidential real property and residential rental property, as long as the property rehabilitates or replaces property which was damaged, destroyed, or condemned as a result of the terrorist attack and was acquired after September 10, 2001. Furthermore, the Liberty Zone depreciation allowance applies to property placed in service on or before December 31, 2006 (or, in the case of nonresidential real property and residential rental property, December 31, 2009), whereas the nationwide depreciation allowance applies only to property placed in service by September 11, 2004.
Note that a taxpayer cannot take a double depreciation allowance -- the Liberty Zone depreciation allowance can only be used for property which does not qualify for the nationwide depreciation allowance.
Another benefit offered by the Job Creation Act is an expansion of the work opportunity tax credit to include employees of businesses which are located in the Liberty Zone, or which moved from the Liberty Zone to elsewhere in New York City due to physical damage from the terrorist attack.
The work opportunity tax credit is available to employers who hire members of certain "targeted groups," including members of families receiving welfare, veterans who are members of families receiving food stamps, and ex-felons who are members of low-income families. Typically, a member of a targeted group must be certified by a local agency as being in the targeted group before the employer can take the tax credit. However, the work opportunity tax credit for Liberty Zone employees does not require the employees to be certified.
The maximum value of the credit for Liberty Zone employees is $2,400 per employee, per year. However, in order to limit this credit to smaller businesses, any business which employs, on average, more than 200 employees on business days during the taxable year is completely ineligible to take the credit.
The work opportunity tax credit for Liberty Zone employees applies to wages paid for work performed during the years 2002 and 2003 only.
Extension of Unemployment Insurance
Almost all states provide unemployment benefits to displaced workers for up to 26 weeks. These benefits are funded by state unemployment insurance taxes. When a state suffers severe unemployment distress (as determined based on the unemployment rate), an additional 13 weeks of benefits may be available; the additional benefits are funded half by the state and half by the Federal government.
While the average person receiving unemployment benefits in 2001 received those benefits for only 14 weeks, some recipients needed more time than the maximum allowed in which to find work; in fact, 28% of recipients exhausted their eligibility in 2001.
Under Title II of the Job Creation Act, titled the "Temporary Extended Unemployment Compensation Act of 2002," unemployed workers who exhaust their regular unemployment benefits are generally eligible for an additional 13 weeks of extended benefits, all of which would be funded by the Federal government, for a total of up to 39 weeks of unemployment benefits for most workers. These benefits are only available to workers who filed their first claims on or after March 15, 2001, and will not be available after January 1, 2003.
The state agencies that administer unemployment insurance programs are generally contacting eligible workers to allow them to apply for the additional 13 weeks of benefits. If you believe you may be eligible but have not received an application, contact your state unemployment insurance agency for information.
The provisions discussed above are not the only ways that a taxpayer can benefit from the Job Creation Act. For example, the Job Creation Act also extended the Archer Medical Savings Account program, as well as the qualified electric vehicle credit, the credit for electricity from renewable resources, the work opportunity tax credit, and the qualified clean-fuel vehicle property deduction. All of these programs predate the Job Creation Act.
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright, 2003 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.