Later Changes
Special Depreciation Allowance
You can claim the special depreciation allowance (an additional 30% depreciation deduction) for new property that you acquire before September 11,
2004, and place in service for your business generally before January 1, 2005, if you meet the other requirements for qualified property covered in
chapter 5. Accordingly, you will generally no longer be able to claim the special depreciation allowance for the qualified property if you acquire it
after September 10, 2004, or place it in service for your business after December 31, 2004. However, you will be able to claim the special Liberty
Zone depreciation allowance (an additional 30% depreciation deduction) for most qualified property if you place it in service in the Liberty Zone
after December 31, 2004, and generally before January 1, 2007, provided you meet the other requirements for qualified Liberty Zone property covered in
chapter 5.
Extension of Placed in Service Date
To qualify for the special depreciation allowance, your property must meet certain tests, including the placed in service date test, as well as the
other requirements covered in chapter 5 of this publication. To meet the placed in service date test, your property must generally be placed in
service for use in your trade or business or for the production of income after September 10, 2001, and before January 1, 2005. However, certain
property placed in service before January 1, 2006, may meet this test. Transportation property and property with a recovery period of 10 years or
longer meet the test if one of the following applies.
- The property has an estimated production period of more than 2 years.
- The property has an estimated production period of more than 1 year and it costs more than $1 million.
Transportation property is any tangible personal property used in the trade or business of transporting persons or property.
For property that qualifies for the special depreciation allowance solely because of the one-year extension of the placed in service date, only the
part of the basis attributable to manufacture, construction, or production before September 11, 2004, is eligible for the special depreciation
allowance.
Special Liberty Zone Depreciation Allowance for New and Used Property
You can claim the special Liberty Zone depreciation allowance (an additional 30% depreciation deduction) for used property that you acquire after
September 10, 2001, if the property meets the requirements listed under Qualified Liberty Zone Property in chapter 5 of this publication.
You will be able to claim the allowance for both new and used property that you acquire after September 10, 2004, provided the property meets the
other requirements for qualified Liberty Zone property.
Depreciation of Property Used on Indian Reservations
The special depreciation rules that apply to qualified property used on an Indian reservation were scheduled to expire for property placed in
service after 2003. These special rules have been extended to include property placed in service in 2004. For more information about these rules, see
Publication 946, How To Depreciate Property.
Indian Employment Credit Extended
The Indian employment credit that was scheduled to expire for tax years beginning after 2003 has been extended to include a tax year beginning in
2004. For more information about this credit, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities.
IRAs and Other Retirement Plans
2002 Changes
Simplified Employee Pensions (SEPs)
Contribution limit increased.
For plan years beginning after December 31, 2001, the annual limit on the amount of employer contributions to a SEP increases to the lesser of the
following amounts.
- 25% of an eligible employee's compensation.
- $40,000 (subject to cost-of-living adjustments after 2002).
Deduction limit.
For years beginning after 2001, the following changes apply to the SEP deduction limit.
Elective deferrals (SARSEPs).
Elective deferrals under a SARSEP are not subject to the deduction limit that applies to employer contributions. Also, elective deferrals are not
taken into account when figuring the amount you can deduct for employer contributions that are not elective deferrals.
Definition of compensation.
Compensation for figuring the deduction for employer contributions includes elective deferrals under a SARSEP.
More information.
For more information about SEPs, see Publication 560, Retirement Plans for Small Business.
403(b) Plans
Figuring catch-up contributions.
When figuring allowable catch-up contributions, combine all contributions made by your employer on your behalf to the following plans.
- Qualified retirement plans.
- 403(b) plans.
- Simplified employee pensions (SEP).
- SIMPLE plans.
The total amount of the catch-up contributions to all plans maintained by your employer cannot exceed the annual limit. For 2002, the limit is
$1,000.
Rollovers to and from 403(b) plans.
If a distribution includes both pre-tax contributions and after-tax contributions, the portion of the distribution that is rolled over is treated
as consisting first of pre-tax amounts (contributions and earnings that would be includible in income if no rollover occurred). This means that if you
roll over an amount that is at least as much as the pre-tax portion of the distribution, you do not have to include any of the distribution in income.
Years of service for church employees and ministers.
If you are a minister or church employee, treat all of your years of service as an employee of a church or a convention or association of churches
as years of service with one employer. Prior law required church employees and ministers to figure years of service separately for each employer.
As a minister or church employee, all contributions made to 403(b) plans on your behalf, as an employee of a church or a convention or
association of churches, are considered made by one employer.
Foreign missionaries.
If you are a foreign missionary, contributions to your 403(b) account will not be treated as exceeding the limit on annual additions if the
contributions are not more than the greater of:
- $3,000, or
- Your includible compensation.
More information.
For more information about 403(b) plans, see Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans).
Later Change
Deemed IRAs
For plan years beginning after 2002, a qualified employer plan can provide for voluntary employee contributions to a separate account or annuity
that is deemed to be an IRA.
For this purpose, a qualified employer plan includes a deferred compensation plan (section 457(b) plan) maintained by a state, a political
subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state.
The term qualified employer plan also includes:
- A qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan),
- A qualified employee annuity plan (section 403(a) plan), and
- A tax-sheltered annuity plan (section 403(b) plan).
More information about IRAs can be found in Publication 590, Individual Retirement Arrangements (IRAs).
Car Expenses
If you purchased a car after September 10, 2001, for use in your business (or as an employee) and figure your deductible expenses using the actual
car expense method, new law contains provisions that may affect your depreciation deduction for that car.
Publication 463, Travel, Entertainment, Gift, and Car Expenses, contains information on figuring depreciation on your car. However,
Publication 463 does not contain the new provisions because it was printed before the law was enacted. The new provisions are in the Supplement
to Publication 463, which is reprinted below.
Supplement to Publication 463 Travel, Entertainment, Gift, and Car Expenses
| |
Introduction
This supplemental publication is for taxpayers who purchased a car for business purposes after September 10, 2001, and figure their deductible
expenses, including a deduction for depreciation, using the actual car expense method.
After Publication 463 was printed, the Job Creation and Worker Assistance Act of 2002 was signed into law by the President. Certain provisions of
this new law may reduce your taxes for 2001. The new law contains the following provisions.
- A new depreciation deduction, the special depreciation allowance.
- An increase in the limit on depreciation for any car for which you claim the new special depreciation allowance.
If you have already filed your 2001 return, you may wish to file an amended return to claim any of these benefits. See Amended Return,
later.
Depreciation of Car
If you used the actual car expense method to figure your deduction for a car you own and use in your business (or as an employee), you generally
can claim a depreciation deduction. However, there is a limit on the depreciation deduction you can take for your car each year. See Depreciation
Limit later.
Special Depreciation Allowance
The new law allows you to claim a special depreciation allowance. This special allowance is a deduction equal to 30% of the depreciable basis of
qualified property. You figure the amount of the special depreciation allowance after any section 179 deduction you choose to claim, but before
figuring your regular depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS). See Depreciation Deduction under
Actual Car Expenses in chapter 4 of Publication 463 for information about MACRS.
You can claim the special depreciation allowance only for the year the qualified property is placed in service.
Qualified property.
Qualified property includes a car (any four-wheeled vehicle, including a truck or van not more than 6,000 pounds, that is made primarily for use on
public streets, roads, and highways) that meets all of the following requirements.
- You bought it new.
- You bought it after September 10, 2001. (But a car is not qualified property if a binding written contract for you to buy the car was in
effect before September 11, 2001.)
- You began using it for business after September 10, 2001, and used it more than 50% in a qualified business use.
Example.
Bob bought a new car on October 15, 2001, for $20,000 and placed it in service immediately, using it 75% for business. Bob's car is qualified
property.
Bob chooses not to take a section 179 deduction for the car. He does claim the new special depreciation allowance. Bob first must figure the car's
depreciable basis, which is $15,000 ($20,000 × .75). He then figures the special depreciation allowance of $4,500 ($15,000 × .30).
The remaining depreciable basis of $10,500 ($15,000 - $4,500) is depreciated using MACRS (200% declining balance method, half-year
convention) and results in a deduction of $2,100 ($10,500 × .20), for a total depreciation deduction for 2001 of $6,600 ($4,500 + $2,100).
However, Bob's depreciation deduction is limited to $5,745 ($7,660 × .75), as discussed next.
Depreciation Limit
The limit on your depreciation deduction for 2001 is increased to $7,660 for a car that is qualified property (defined above) and for which you
claim the special depreciation allowance. The limit is increased to $23,080 if the car is an electric car. The section 179 deduction is treated as
depreciation for purposes of this limit.
If you use a car less than 100% in your business or work, the limit is $7,660 (or $23,080 for an electric car) multiplied by the percentage of
business and investment use during the year.
For cars that do not qualify for (or for which you choose not to claim) the special depreciation allowance, the limit remains $3,060 ($9,280 for
electric cars).
Amended Return
If you filed your 2001 calendar year return before June 1, 2002, and did not claim the new special depreciation allowance for a qualified car, you
can claim it by filing an amended return on Form 1040X, Amended U.S. Individual Income Tax Return, by April 15, 2003. At the top of the
Form 1040X, print Filed pursuant to Revenue Procedure 2002-33. If you are an employee, attach Form 2106, Employee Business
Expenses (revised March 2002). If you are self-employed, attach Form 4562, Depreciation and Amortization (revised March 2002).
Or, you can claim the special depreciation allowance by filing Form 3115, Application for Change in Accounting Method, with your 2002
return. For details, see Revenue Procedure 2002-33. (But, filing Form 1040X for 2001 enables you to claim the special allowance earlier than
attaching Form 3115 to your 2002 return.)
You cannot claim the special depreciation allowance on an amended return (or by using Form 3115) if you made, or are treated as having made, the
election not to claim it described later.
Example.
The facts are the same as in the previous example except that Bob filed his original 2001 income tax return on April 15, 2002, and claimed a $3,000
($20,000 x .75 x .20) depreciation deduction for his new car using MACRS.
Bob now wishes to claim the special depreciation allowance for his new car on an amended 2001 return. Bob, who is an employee, files Form 1040X, by
April 15, 2003, with an updated Form 2106 (revised March 2002) attached, increasing his total depreciation deduction to $5,745, as figured in the
earlier example.
Bob's new filled-in Form 2106 is shown later.
Election Not To Claim Special Allowance
You can elect not to claim the special depreciation allowance for a car by making a statement attached to, or written on, your return
indicating that you are electing not to claim the special depreciation allowance for 5-year property. As a general rule, you must make this election
by the due date (including extensions) of your return.
You can have an automatic extension of 6 months from the due date of your return (excluding extensions) to make the election with an amended
return. To get this extension, you must have filed your original return by the due date (including extensions). At the top of the statement, print
Filed pursuant to section 301.9100-2.
If you elect not to claim the special depreciation allowance for a car, you cannot claim it for any other 5-year property placed in service during
the same year.
Unless you elect (or are treated as electing) not to claim the special depreciation allowance, you must reduce the car's adjusted basis by the
amount of the allowance, even if the allowance was not claimed.
Deemed election for return filed before June 1, 2002.
If you did not make the election not to claim the special depreciation allowance in the time and manner described above, you will still be treated
as electing not to claim it if all of the following apply.
- You filed your 2001 return before June 1, 2002.
- You claimed depreciation on your return but did not claim the special depreciation allowance.
- You did not file an amended 2001 return by April 15, 2003, or a Form 3115 with your 2002 return, to claim the special depreciation
allowance.
Form 2106, Page 1, for Bob Smith
Form 2106, Page 2, for Bob Smith
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