THE JOB CREATION AND WORKER ASSISTANCE ACT
(IOWA IS NOT FULLY FOLLOW ING THE FEDERAL ACT)
Here for an article about how IOWA is handling the new act .)
After nearly six months of partisan politics, congress passed a watered-down version of economic stimulus legislation . . . The "Job Creation and Worker Assistance Act". As is often the case in tax legislation the act is filled with all sorts of compromises some of which will create problems for taxpayers who filed early.
AMENDED 2001 RETURNS WILL BE NEEDED. A number of the provisions are retroactive to the 2001 tax year. This will provide an opportunity to create refunds by filing amended returns for clients who have already filed their 2001 tax returns. For instance, the new NOL carryback rules and the new 30% first year depreciation are effective for all or part of 2001. The new law actually requires that unless taxpayers elect not to do so, the thirty percent depreciation write-offs discussed below must be taken. (The IRS is expected to issue details about how to make that election and to provide a revised Form 4562 shortly.)
WHAT'S IN THE ACT? The new law provides greater depreciation deductions for business investment, extends a number of expiring tax benefits (but not the Research & Development Credit), includes a number of "technical corrections" to the Tax Relief Act of 2001, and offers $5 billion of special tax breaks to help lower Manhattan recover from the September 11th terrorist attacks.
The new law does very little for individuals. During
2002 and 2003 elementary and high-school teachers will be allowed to deduct up to $250 of supplies they buy for their classroom each year without having to itemize deductions. There are some changes in NOL carryback rules that will help some taxpayers. For the most part, however, the act is focused on producing tax breaks for business.
The act increases taxes for a few taxpayers.
For years ending after March 9, accrual taxpayers who exclude income that experience indicates will not be collected will be limited to firms grossing under $5 million a year or to personal service companies such as health care providers, accountants, lawyers, architects, engineers, etc. Effective October 11, 2001, S Corporation shareholders will no longer be able raise their tax basis in the company by the amount of tax-free income from debts that are waived.
Business assets acquired after September 10th are eligible for a special 30% first-year depreciation bonus.
Taxpayers will be able to write-off thirty percent of an asset's cost during the first year placed in use. The rest of the cost will be recovered under the regular depreciation schedules. Taxpayers who have partially expensed the cost of a qualifying asset under Section 179 are can write off thirty percent of the rest of the cost of a qualifying asset. The special first-year deduction will also apply for minimum tax purposes.
Assets that qualify are those placed in service after September 10, 2001 and before September 11, 2004 or those acquired under a binding written contract entered into during that period. IMPORTANT: Assets that were contracted for prior to September 11, 2001 do not qualify for this additional depreciation.
Only NEW assets qualify
. . . the taxpayer must be the first person who uses the asset. There is no thirty percent write-off for used assets.
Eligible assets are those depreciated over 20 years or less
. These include machinery, equipment, land improvements and farm buildings. Even leasehold improvements made to the interior of commercial realty.
The additional depreciation write-offs must be taken
unless taxpayers elect not to do so. The IRS is expected to issue details about how to make that election and provide a revised Form 4562 within a few days.
Maximum first-year write-offs for autos and light trucks used in business
that were put in service after September 10, 2001 is increased to $7,660 (a $4,600 increase).
Net operating losses can now be carried back five years
instead of two years as was the case under prior law. The carryback change is effective for years ending after 2000. This means that the change also applies to fiscal years ending anytime in 2001.
Loss carryovers can offset more AMT income.
For tax years ending in 2001 and 2002 taxpayers can use carryovers to offset 100% of their AMT income instead of 90%. This change has a negative impact on some taxpayers. It wastes the AMT exemption of marrieds with AMT income under $490,000 and corporations with AMT income under $400,000.
Congress modified rules relating to deemed sales.
Deemed sales are those that are realized because of a special election that investors can make to treat assets being held as if they were sold in Jan. 2001. By making such an election, future gain can be taxed at a lower tax rate.
The new act provides that the (up to a maximum $500,000) home sale exclusion does not apply to deemed sales and that deemed sales of rental property can only free up a rental property's suspended passive losses to the extent that they offset any gain being realized. The provisions are retroactive so we can expect some guidance on how to handle this issue from the IRS shortly.
Additional foster care payments are exempted from tax.
Payments by any agency approved by a state or local gov't are eligible to be excluded beginning in 2002. The new act exempts payments for the care of individuals over age 18.. Payments from non-tax-exempt organizations can be excluded as well.
Defined-benefit plans can use a higher interest rate
to calculate required payins and gov't insurance premiums for 2002 and 2003 plan years. New rate will mean lower plan contributions and smaller gov't premiums.
A number of expired or expiring tax breaks are now extended.
The new law extends many of the temporary tax breaks that either have already expired or were scheduled to expire this year. Among them are tax-sheltered Medical Savings Accounts, a provision that protects many personal tax credits from being reduced by the alternative minimum tax., the tax credit for electric vehicles, work opportunity tax credit, and the welfare-to-work credit.
The following tax breaks are extended and/or retroactively extended through 2003:
AMT relief for folks claiming dependent care and tuition credits.
The Tax credit for low-income savers.
Work opportunity and welfare-to-work credits for hiring the disadvantaged.
The suspension on the ceiling on percentage depletion for marginal oil & gas wells which means percentage depletion can exceed 100% of property’s net income.
Credits for energy from non-conventional sources such as wind, biomass and poultry litter.
The planned reduction in the maximum amount of the tax credit for electric vehicles as well as cuts in deductions for clean-fuel assets and hybrid cars.
Archer medical savings accounts.
Rules requiring parity between physical and mental health benefits.
Tax breaks on foreign financial service income are extended until 2007.
1099 forms can be delivered electronically
via the Internet if the recipient consents, the same as for W-2s.
The 2002 SEP pay-in deduction limitation is now 25% of pay
instead of 15%. (Congress failed to change the cap in last year's law.) The 25%-of-pay SEP ceiling for self-employed taxpayers has been reduced to 20%. These changes bring SEPs into line with the rules for other plans.
IOWA STATUS ON COUPLING WITH
FEDERAL ECONOMIC STIMULUS BILL
On March 26, 2002 the Iowa Department of Revenue issued a bulletin advising that Iowa does not intend to follow the provisions of the recently-enacted federal economic stimulus bill (H.R. 3090).
House File 2116 recently passed by the Iowa Legislature (and expected to be signed by the Governor) has only updated the references to the Internal Revenue Code as of January 31, 2002. This encompasses the federal tax changes made in 2001, but does not include the changes made in March 2002 relating to the economic stimulus bill.
According to the bulletin, there were three main provisions of this bill that have an impact on Iowa tax. Iowa will not be coupling with the following:
The federal bill provides for a bonus depreciation equal to 30% of the cost of an asset placed in service between September 11, 2001, and September 30, 2004. Iowa will not be coupling with this provision. Depreciation will be computed using the method used for federal income tax purposes prior to September 11, 2001. At this time, it is anticipated that Iowa will develop its own depreciation form, which will look similar to the federal form 4562 depreciation schedule prior to the passage of this bill.
An adjustment will have to be made on the Iowa return for the difference between the federal depreciation and the Iowa depreciation. Also, the basis of the asset will be different for federal and Iowa purposes, so an adjustment may also be necessary in the year the asset is sold.
Net Operating Losses
The bill allows for a 5-year carryback of net operating losses incurred in 2001 and 2002. Iowa has its own net operating loss provisions for a 2-year carryback, and Iowa law will not be changed based on the passage of the federal bill. Therefore, for net operating losses incurred in 2001 and 2002, the loss carryback for Iowa purposes will remain at 2 years.
Deduction for Teacher Supplies
The bill provides for a deduction for the 2002 and 2003 tax years of up to $250 for teachers for their out-of-pocket expenses in providing classroom supplies. Iowa will not be coupling with this provision, so the deduction available for federal purposes will not be allowed for Iowa.
The legislature is in the wrap-up phase of the session and in light of the state's budget problems, there is almost no chance that an attempt will be made to bring Iowa law into compliance with the 2002 federal act before the 2003 legislature takes up the matter next year.