On March 9, 2002 the "Job Creation and Worker Assistance Act of 2002" was signed into law by the President. Though this bill was touted as extending unemployment benefits by an additional 13 weeks, the bill mostly benefits businesses and investors. What's more, several changes are retroactively effective and may affect returns that have already been filed for 2001.

Tax breaks for businesses and investors

An additional 30% first-year depreciation writeoff for most types of new capital assets (other than buildings) acquired after Sept. 10, 2001, and before Sept. 11, 2004, and placed in service before 2005. In effect, this additional writeoff means that you can recover more of the cost of a business asset in the year you place it in service. What qualifies for the extra 30% depreciation writeoff? Most types of new, non-realty assets, such as business machines, computers, most types of computer software, many types of production equipment, trucks, trailers, and business furniture.

For example, if a business bought a new $10,000 machine normally depreciated over five years, the first-year writeoff under the new law is $4,400 as compared to only $2,000. The extra 30% first-year writeoff also applies to certain types of interior improvements to leased nonresidential realty (such as an office building or factory).

Taxpayers also are entitled to an extra 30% depreciation writeoff for qualified leasehold improvements. In general, these are interior improvements made under a lease to commercial property (such as an office building or warehouse), and placed in service more than three years after the building was first placed in service. Certain structural improvements don't qualify, and neither do expansions. Additionally, the improvements generally must be acquired after Sept. 10, 2001, and before Sept. 11, 2004, and placed in service before 2005.

These depreciation changes are retroactively effective (that is, they apply to qualifying new property acquired after Sept. 10, 2001). As a result, returns that have already been filed for tax year 2001 (as well as 2000 returns of some fiscal-year businesses) may have to be amended to take advantage of the additional writeoff. However, under some circumstances, a taxpayer may be better off not claiming the extra first-year depreciation deduction.

The first-year depreciation dollar cap on new luxury autos bought for business purposes is increased by $4,600, effective for autos acquired after Sept. 10, 2001 and before Sept. 11, 2004. For qualifying autos bought in 2001 or 2002, that means a maximum first year writeoff of $7,660, instead of $3,060. This means a larger up-front deduction for those who buy new autos for use in their business or practice. The auto must be used more than 50% for business, and the full benefit of the increased dollar cap is available only if the auto is used exclusively for business.

Net Operating Loss (NOL)

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. A net operating loss ("NOL") is, generally, the amount by which a taxpayer's allowable deductions exceed the taxpayer's gross income. A carryback of an NOL generally results in the refund of Federal income tax for the carryback year. A carryforward of an NOL reduces Federal income tax for the carryforward year.

In general, an NOL may be carried back two years and carried forward 20 years to offset taxable income in the earlier years. A three-year carryback applies for NOLs arising from casualty or theft losses of individuals, or attributable to Presidentially declared disasters for farmers or small businesses. The carryback period may be waived.

The 2002 Act increases the usual two and three year carryback periods to five years for NOLs arising in tax years ending in 2001 or 2002. A taxpayer may elect to forgo the five-year carryback period and instead carry the NOL back 2 years (or 3 years, if applicable) and forward 20 years. Such an election must be made by the due date of the return (including extensions) for the year of the loss, and, once made, is irrevocable. Taxpayers should bear in mind that a waiver of the carryback period also applies for alternative minimum tax purposes.

Consideration should be given to waiving the 5-year carryback period if the taxpayer was in a low bracket in the fifth, fourth, and third years back and expects to be in higher brackets going forward. A taxpayer in this situation should also consider waiving the 2-year (or 3-year) carryback period if the taxpayer was in a low bracket in the preceding 2 or 3 years.

There is also a temporary easing of restriction on use of NOLs against AMT. Under the alternative minimum tax rules, an alternative tax net operating loss deduction (ATNOL) cannot reduce a taxpayer's alternative minimum taxable income ("AMTI") by more than 90 percent. Under the 2002 Act, an ATNOL attributable to (1) NOL carrybacks arising in tax years ending in 2001 or 2002, or (2) NOL carryforwards to 2001 and 2002 tax years, may offset 100% of a taxpayer's AMTI. Thus, for example, under the Act, a calendar year taxpayer's ATNOL consisting exclusively of a carryback arising in 2001 would be carried back to '96 (under the Act's 5-year rule discussed above) and could fully offset the taxpayer's AMTI for '96.

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

A two-year reprieve from an onerous rule that would have reduced an individual's personal nonrefundable credits (such as education credits) because of the alternative minimum tax (or AMT). Under the new law, for 2002 and 2003, you'll be able to use your personal nonrefundable credits to offset both your regular tax liability and your AMT 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's 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's 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. For those years, regardless of whether you itemize your deductions or not, if you qualify as an "eligible educator," you will be allowed a "classroom expense deduction" of up to $250 for expenses that you pay in connection with books, certain supplies, computer equipment (including related software and services), other equipment, and supplementary materials that you use in the classroom.

An eligible educator is an individual who is a kindergarten through 12th grade teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year, and a school is any school which provides elementary education or secondary education (kindergarten through 12th grade), as determined under state law.

Retention of Records - - How Long?

Generally, records such as tax returns and related documents should be kept for a minimum of 6 to 7 years. Records pertaining to the purchase of a home or other such assets should be kept for a longer period. The Statute of Limitations is 3 years for Federal and 4 years for California returns or under certain circumstances, generally cases involving fraud, the Statute is 6 years. However, if you fail to file a return, the Statute of Limitations never closes. The AICPA in conjunction with the Office of the Federal Register issued a checklist which may be used as a guide. However, in some cases your advisor should be consulted due to other legal considerations.