By Paul N. Gada, Business Owner's Toolkit Staff Writer

Who says miracles can't happen in the District of Columbia? After months of political battling and partisan gridlock, Congress finally got their act together long enough to pass an economic stimulus tax package.

The Job Creation and Worker Assistance Act of 2002 (Job Creation Act), enacted March 9, 2002, offers $42.9 billion in tax breaks. The new legislation is also very generous to small business owners.

Judging by its name, the primary focus of the Job Creation Act would seem to be creating jobs. In addition, our leaders in Washington, including President Bush, have publicly praised the new tax package as being all about jobs. In reality, however, job creation is only a minor part of the Job Creation Act.

Although some specific job-related provisions exist, the Job Creation Act has far more sections that deal with extending unemployment assistance, providing tax incentives for New York City recovery efforts, and even making technical corrections to old tax laws. More importantly, the lion's share of the tax breaks goes to small business owners.

Business Provisions

The two biggest tax breaks directly affecting businesses are the creation of a temporary 30 percent depreciation bonus and an extension of the net operating loss (NOL) carryback period from two to five years (with a waiver of the alternative minimum tax depreciation for this allowance). These provisions are extremely important when heading into your 2001 tax filing season because they may result in an immediate tax savings for your business.

If you have already filed your 2001 federal tax return, don't panic. If you qualify, you can still get the benefit of one of the tax breaks by simply filing an amended return.

Depreciation bonus -- Businesses are now entitled to an additional first-year depreciation deduction equal to 30 percent of the value of certain types of qualified property. Qualifying property includes:

• property with a recovery period of 20 years or less
• water utility property
• certain types of computer software (i.e., software not covered under Internal Revenue Code Section 197)
• qualified leasehold improvements

As you can see, this covers a very broad range of property eligible for the extra depreciation deduction. The catch is that such property must be acquired after September 10, 2001, and before September 11, 2004. Also, the property must be placed in service on or after September 11, 2001, and before January 1, 2005.

The extra depreciation deduction can be used in addition to the small business expensing election, which allows a deduction of up to $24,000 for assets purchased and placed in service in 2001 or 2002. Also, a business that purchases a vehicle and can't take advantage of the expensing election because of the depreciation cap on such vehicles can claim an extra $4,600 in the year the vehicle is placed in service. Keep in mind, though, that both the purchase and business use have to start after September 10, 2001.

The retroactive effect of this tax break for purchases is a big help to businesses trying to recover from the September 11 disaster. For other businesses, the tax break is a bit of a windfall if a business just happened to buy and start using property at the end of last year. However, this shouldn't diminish your use or enjoyment of the tax break if you are lucky enough to qualify for it.

Net operating losses -- A business can generally carry back an NOL two years (three years when casualty losses are involved). The Job Creation Act temporarily extends the carryback period to five years for losses arising in tax years 2001 and 2002. The NOL deduction can also be used to reduce alternative minimum taxable income liability up to 100 percent.

A qualifying business must elect out of this special treatment or else be bound by it. Unfortunately, the Job Creation Act leaves it up to the IRS to establish the opt-out procedures. Hopefully, the IRS will scramble fast enough to provide some guidance by the April 15 filing deadline.

New York City Liberty Zone

The Job Creation Act establishes a New York City Liberty Zone (essentially southern Manhattan) and offers additional tax breaks for businesses recovering from the September 11 terrorist attacks. The new tax breaks also supplement those provided by the Victims of Terrorism Tax Relief Act of 2001, enacted January 23, 2002.

The tax breaks related to the Liberty Zone apply to tax years ending after 2001. The following are highlights of the Liberty Zone provisions that are most likely to affect a business:

• The maximum expensing election limit is increased to $35,000 (instead of $24,000) for those within the zone.
• An additional 30 percent depreciation deduction is added to the normal first-year depreciation deduction.
• The Work Opportunity Tax Credit is extended to a new targeted group which includes:
  1. individuals substantially performing all their services in the recovery zone for a business in the zone
  2. individuals substantially performing all their services in New York City for a business that had to relocate out of the zone due to the terrorist attacks

Extension of Tax Credits and Provisions

The legislation also breathes new life into a number of expiring tax credits and provisions. This is also where the bulk of the job creation publicized by politicians occurs. The extensions include:

• Credit for qualified electric vehicles -- Once set to begin phasing-out in 2002, taxpayers can now take the full amount of this credit for an additional two years, through 2003. The maximum tax credit allowed for qualified electric vehicles placed in service in 2002 and 2003 is 10 percent of its cost (up to $4,000). The phase-out of this credit that was to begin in 2002 has been postponed until 2004, when the credit will be reduced by 25 percent. The credit will then be reduced by 50 percent in 2005, by 75 percent in 2006, and will be eliminated entirely in 2007.
• Deduction for clean fuel vehicles -- Similar to the credit above, the deduction from a business owner's gross income for using vehicles powered by cleaner-burning fuels has been extended through 2003. The deduction for qualified vehicles placed in service after that will be reduced by 25 percent in 2004, 50 percent in 2005, 75 percent in 2006, and eliminated completely in 2007. This phase-out would have begun in 2002 if not for the new legislation.
• Work opportunity credit -- The incentive for employers to hire persons from certain disadvantaged groups has been extended through the end of 2003. Not only is this a break for those in such disadvantaged groups, employers can also continue to get a reward (up to $2,400 per employee) for hiring such employees in either 2002 or 2003.
• Welfare-to-work credit -- In a similar vein, the credit for hiring qualified long-term family assistance recipients has been extended through the end of 2003. For small business employers in the market to hire new employees, this means that there is a two-year maximum credit of $8,500 per employee available to help defray the substantial costs involved in keeping an employee on the payroll.
• Indian employment credit -- This credit has been extended another year and will now expire at the end of 2004. This is good news if your business is located on an Indian reservation because it allows more opportunity to claim this special tax credit (up to $20,000 per qualified employee).
• Medical Savings Accounts -- The availability of Archer Medical Savings Accounts (MSAs) has once again been extended for another year (through the end of 2003). 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.

Too Little, Too Late?

There are a number of noteworthy things that can be said about the Job Creation Act. The most noticeable thing is the speed with which the legislative dam burst. After months of legislative impasse, the Job Creation Act sailed through the House of Representatives, the Senate and the Oval Office in a mere three days time. It is more than likely that the impending six-month anniversary of the September 11 terrorist attacks had something to do with the speed of final enactment. Let's hope that this does not turn into a situation where political haste makes waste.

From a practical perspective, it is also debatable whether the Job Creation Act will serve its purpose as an economic stimulus. According to his comments to Congress on March 7, 2002, Federal Reserve Chairman Alan Greenspan believes our economic recovery is well under way. On the other hand, House Minority Leader Richard A. Gephardt (D-Mo.) and House Speaker J. Dennis Hastert (R-Ill.) both agree that a stimulus bill would be helpful despite an increasingly strong economy.

"I would say that we are not completely out of this recession yet," said Hastert. "We are going to see people continue to lose jobs because companies are trying things to make themselves more efficient and there will continue to be some layoffs."

"If you're unemployed, you're hurting," said Gephardt. "I do think that it makes some sense to do something to try to engender some economic growth and to get corporations and individuals in a place where they can get back into economic activity."

Whether enacted for political reasons or as a belated effort to help the economy, the message to small business owners is the same: Take advantage of any tax breaks you can while you still can. The federal government has been giving a lot of tax breaks within the last year, while at the same time increasing its spending on such things as homeland security and the military. It doesn't take a mathematician to figure out that this combination will eventually equal a fiscal problem.

So, don't be shy about claiming any of the new tax breaks you are entitled to. The federal government certainly won't be shy about eliminating the tax breaks or otherwise raising your taxes when needed.

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