THE JOB CREATION AND
WORKER ASSISTANCE ACT OF 2002
(An engineering/valuation consultants perspective)
July 15, 2002
Written by Cal Fugitt
The Job Creation and Workers Assistance
Act of 2002 will have a dramatic impact on capital cost recovery
and should result in job stimulus through investment in new plant
and property. Some might characterize this legislation as generous
but it is certainly important considering the events of September
11th and subsequent economic woes.
The act covers many business incentives and fixes some
issues that were troublesome in the Bush Tax Cut bill
passed in the summer of 2001. Our focus for this paper is the impact
on the purchase of newly acquired business assets, including purchased
software and leasehold improvements, covered in the 2002 Act.
The new rules are retroactive to September 10, 2001. It may be worth
amending your 2001 tax return if already filed, to take advantage
of the new rules. It may be an inconvenience but well worth the
effort if the benefits are material. It is unclear how the various
State Taxing Authorities will react.
The act or new law, allows taxpayers to immediately
deduct 30% of the cost of qualifying assets. The remaining 70% is
then depreciated or amortized over the number of years specified
by the existing MACRS (Modified Accelerated Cost Recovery System).
Guidelines for eligibility include:
1. Assets must have a recovery period of 20 years
or less. The majority of business assets will pass this test. Some
leasehold improvements and purchased software (other than software
acquired as part of an overall business purchase transaction, which
are subject to a special 15-year rule under Section 197) are also
2. Qualifying assets must have been purchased after September 10,
2001 but before September 11, 2004. Assets acquired under a binding
contract entered into between those dates will pass the test.
3. The original use of these qualifying assets must commence after
September 10, 2001. This means that assets must be new rather than
reconditioned or rebuilt. However, certain costs to rebuild or recondition
existing assets may also pass the original use test and thus qualify
for the 30% immediate write-off.
4. Qualifying assets generally must be placed-in-service
no later the December 31, 2004. Extension of that deadline to December
31, 2005 is allowed for certain transportation assets and other
property with recovery periods of ten or more years. Under this
extended deadline only costs incurred before September 11, 2004
will be eligible for the immediate 30% deduction.
These new breaks should not have any negative impact on taxpayers
in AMT (Alternative Minimum Tax). The same treatment will apply
for AMT when an asset qualifies for the 30% immediate write-off.
If you are building new facilities or improving owned or leased
facilities, and fit within the guidelines of these new rules, it
will make more sense than ever to maximize these deductions. Tax
savings through reclassification are possible by finding longer
lived-assets that can be legitimately changed into shorter-lived
categories. The obviously qualifying assets include plant machinery
& equipment, office furniture, technology-oriented equipment,
etc. and will all qualify. Examples of hidden assets include electrical,
data cabling, built-in furniture, certain plumbing items, certain
concrete support work that are specifically installed for the process
or function of qualifying assets, and many other items we find hidden
or buried in construction trade accounts. Dont forget that
other land improvements have a fifteen year life and should qualify
for this post 9/10 tax treatment. A lot of land improvement
costs are hidden in construction trade accounts that will otherwise
be categorized as 39-year lives for tax and not qualify for this
The benefit of the act for straight personal property
purchases is clear. You get a 30% deduction now. The remaining 70%
is depreciated over the appropriate tax life. Depending on the category
and the organizations effective tax rate, this can equate to a benefit
in the 11% range (essentially a credit).
The benefit for other improvement projects with a 15
(not to exceed 20) year life, the benefit is much more dramatic.
Our calculations show incremental benefit in the 30 to 35% range
over normal lifing and depreciation guidelines.
The benefit of finding or reclassifying categories in conjunction
with a cost segregation analysis, with hidden shorter-lived assets
buried in construction trade lines is huge. Electric service for
Machinery & Equipment installations, machine foundations, telephone
infrastructure and many more items we find for depreciation cash
flow enhancement now have tremendous importance in your post
construction or planning phase.
The opportunity to reclassify assets from I.R.C. Section 1250 to
1245 property originated during the early days of the Investment
Tax Credit (ITC). The new act is comparable or better
in many respects. Capital Cost Recovery Services involves finding
and supporting these otherwise hidden or process related assets
buried in overall trades accounts. It requires in-depth knowledge
of engineering, construction and appraisal as well as tax expertise.
The services are not an accounting for tax service line.
It is an often-overlooked function that is worth exploring. Contact
us for more information.
Note: This paper is a non-CPA perspective. Readers should consult
with their tax accountant or advisor and review the act
in detail for clarification. Cost Tech Consulting is a Capital Cost
Recovery firm specializing in providing engineering and appraisal
services related to Cost Segregation, purchase price allocation,
property records review and depreciation consulting.