Tax Update: 2nd Quarter 2002

© 2002 Wayne M. Davies

The Federal Government Is At It Again!

In case you missed it, Congress and the President passed yet another tax bill.  On March 9, 2002, the Job Creation and Worker Assistance Act of 2002 became law.  Before you yawn and fall asleep at the mere mention of more tax law changes, please read on!  This new bill could effect you and actually save you some money!

The primary purpose of this act is to stimulate the economy, provide relief for businesses in lower Manhattan affected by the September 11 terrorist attacks, and provide extensions of tax breaks about to expire.

One of the most significant changes of the act is an additional 30 percent depreciation available for new depreciable assets (with a 20-year life or less) that were purchased after September 10, 2001 and before September 11, 2004.  Currently, IRS instructions require the additional depreciation to be taken, unless the taxpayer files an election to the contrary. 

Now here's the real important part: This law is retroactive to January 1, 2001 and applies to individual as well as business returns.  So those who have already filed their 2001 return will be required to file an amended return to claim the additional depreciation, or to file an election to opt out of taking it.

So this is another example of the government trying to do something to help taxpayers by passing another complicated tax law. In order to benefit from the new law, you will have to file an amended return for Year 2001.  Even though the new law was passed on March 9 (a mere 6 days prior to the due date for corporation returns), the IRS wasn't even ready to accept returns which utilize the new law until April 8 (a mere 7 days prior to the due date for personal returns, partnership returns, and LLC returns). 

So here's my opinion on all this.  Unfortunately, this is a great idea with terrible timing.  The federal government is trying to do something to stimulate the economy, so they figure that businesses could use an extra tax break.  But the implementation of this idea is very poor.  To get the tax break, you must file an amended return.  And if you don't file the amended return, you will probably lose the tax break.  Great idea.  Bad implementation.

So here's the deal -- if you bought any fixed assets in Year 2001 after September 11, give me a call to talk about how this new law applies to you.

If you took the full deduction for any assets bought after September 11 by claiming the Section 179 deduction, then this new law does not effect you at all. 

Confused?  I HOPE SO!!!  Don't feel bad -- this is a confusing situation.  If you have any questions about this new law and whether it applies to you, please get "un-confused" by calling me to talk about it.

One More Change -- This One Is Better!

Effective January 1, 2002 the mileage rate was increased from 34.5 cents/mile to 36.5 cents/mile.  This is important for all taxpayers who use the mileage rate method to deduct their automobile expenses.

If you deduct the actual cost of your automobile (gas, oil, repairs, maintenance, insurance, depreciation, etc) then the mileage rate is not applicable to you.

But many taxpayers prefer the mileage method.  It requires much less record-keeping (all you have to keep is a written log of your business mileage).  And especially with less expensive, fuel-efficient cars you often come out ahead by getting a bigger deduction with the mileage method compared to the actual expense method.

Example:  In 2002, let's say you drive your vehicle 10,000 miles for business.  That translates into an actual deduction of $3,650 (10,000 miles X .365).  Assuming you pay combined federal and state income tax of 32%, that deduction of $3,650 translates into actual tax savings of $1,168.

Which method is better for you?  The Actual Expense Method or The Mileage Method? 

The answer, of course, is: "IT DEPENDS!"

It depends on what kind of car you drive, how many miles you drive for business, and what kind of business you own.

Give me a call for a quick analysis of your particular situation. 

YouSaveOnTaxes.com

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4660 W. Jefferson Blvd., Suite 220

Fort Wayne, IN 46804

Tel: (260) 459-3858 / Fax: (260) 459-0124

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