After months of debate and the passage of several economic stimulus bills, all of which languished in the Senate, Congress passed and the President signed a long-awaited economic stimulus package on Saturday, March 9, 2002.  In keeping with the spirit of providing economic stimulus, the Job Creation and Worker Assistance Act of 2002, in addition to providing much needed relief on the personal side, also provides many important provisions affecting businesses.  Several provisions are retroactive to 2001, requiring immediate attention as businesses prepare and file or, in many cases, have filed their 2001 tax returns.  The following are some of those provisions that warrant more immediate attention.

Bonus Depreciation

A key provision in the Act that serves as one of the economic stimulus cornerstones is the 30% bonus depreciation.  Effective for qualified property acquired after September 10, 2001, and before September 11, 2004 (and placed in service, generally, before January 1, 2005), taxpayers are entitled to bonus depreciation equal to 30% of the property’s adjusted basis.  In general, qualified property consists of property with a recovery period of 20 years or less, certain computer software, water utility property, and qualified leasehold improvements.  In addition, property may qualify for the small business expensing election of up to $24,000 in 2001 and 2002, scheduled to increase to $25,000 in 2003.  The bonus depreciation is allowable for both regular and alternative minimum tax purposes.   In many cases where 2001 tax returns have already been filed, it may be necessary to file amended returns to take advantage of this provision.  

Net Operating Losses (NOL)

The Act temporarily extends the NOL carryback period from the previous 2 years to 5 years for NOLs incurred in tax years ending in 2001 and 2002.  The new law also allows an NOL deduction attributable to NOL carrybacks arising in taxable years in 2001 and 2002, as well as NOL carryforwards to these taxable years, to offset 100% of a taxpayer’s alternative minimum taxable income.  The Act provides taxpayers one opportunity to elect out of the extended carryback period (i.e., to retain the 2 year carryback period). In certain situations, taxpayers will want to make this election (e.g., the taxpayer’s tax rate is lower in the earlier year).   As this election is due by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the NOL, the IRS will need to determine quickly how the election rules will operate for 2001 on returns that have already been filed.  The IRS will be issuing instructions on how to elect out of the enhanced five-year carryback on 2001 returns that are yet to be filed.

Discharge of S Corp Indebtedness

The Act reverses the Supreme Court decision in Gitlitz v. Commr, 531 US 2206.  In Gitlitz, the Supreme Court held that, while discharge of indebtedness income (DOI) may be excluded from an S corporation's gross income when the taxpayer is insolvent, it continues to qualify as income for purposes of increasing the shareholder's stock basis in the S corporation.  Effective for DOI after October 11, 2001, the Act expressly provides that the S corporation's income that is excluded from gross income will not increase the shareholder's stock basis in the S corporation.