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How the 2003 Jobs and Growth Act Relates to Businesses & Corporations- September 2003
Richard Scrivanich - Partner

The 2003 Jobs and Growth Act includes two temporary tax breaks designed to encourage immediate investments. Under the first of these breaks, small companies can expense up to $100,000 in new equipment investments through 2005. Under a second provision, businesses can depreciate more of their assets sooner through 2004. Another change for corporations affects the estimated tax payment rules for 2003.

The 2003 Jobs and Growth Act vastly liberalizes the expensing election, which permits small businesses to expense (i.e., deduct immediately rather than depreciate over several years) a certain amount of the cost of tangible depreciable personal property purchased and placed in service during the tax year in an active trade or business. All of the following expensing changes are effective for tax years beginning after 2002 and before 2006:

• …The maximum annual expensing amount is $100,000 (it was $25,000 before).
• …The maximum annual expensing amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeds a specified dollar level. This dollar level is increased to $400,000 (from $200,000).
• …The above increased dollar amounts will be inflation-indexed for tax years beginning after 2003.
• …Off-the-shelf computer software is made eligible for expensing.
• …Taxpayer revocation of expensing elections will no longer require IRS consent.

A second major change affecting businesses is an increase and extension of bonus first-year depreciation. In general, before the 2003 Jobs and Growth Act, a 30% additional first-year depreciation allowance applied to the non-expensed portion of qualified property (which included most new MACRS property) if: (1) its original use commenced with the taxpayer after Sept. 10, 2001; (2) the asset was acquired by the taxpayer after Sept. 10, 2001 and before Sept. 11, 2004; and (3) it was placed in service by the taxpayer before 2005 (before 2006 for certain property with longer production periods).

The 2003 Jobs and Growth Act makes the following changes:

• …For 30% bonus first-year depreciation purposes, property can be acquired before 2005.
• …50% bonus first-year depreciation applies to qualified property if (1) its original use commences with the taxpayer after May 5, 2003; (2) the asset is acquired by the taxpayer after May 5, 2003 and before 2005 (there can't be a written binding contract for acquisition in effect before May 6, 2003); and (3) it is placed in service by the taxpayer before 2005 (before 2006 for certain property with longer production periods).
• …Taxpayers can elect on a class-by-class basis to claim 30% instead of 50% bonus first-year depreciation for qualifying property, or elect not to claim bonus first-year depreciation at all. Two situations in which a taxpayer would likely consider making an election to claim smaller bonus first-year depreciation (or to elect out of it entirely) are where the taxpayer (1) has about-to-expire net operating losses, or (2) anticipates being in a higher tax bracket in future years.

Note that there still is no AMT depreciation adjustment for the entire recovery period of qualified property recovered under the bonus first-year depreciation rules (50% or 30%).

Another change for corporations affects only the estimated tax payment rules for 2003. Despite the general rule that estimated tax payment installments must be made no later than Apr. 15, June 15, Sept. 15 and Dec. 15, 25% of the amount of any required installment of corporate estimated tax which is otherwise due in Sept. 2003 will not be due until Oct. 1, 2003. This change affects corporations using:

1. the calendar year (third installment of estimated tax would have been due on Sept. 15, 2003);
2. a fiscal year ending Mar. 31, 2004 (second installment would have been due on Sept. 15, 2003);
3. a fiscal year ending May 31, 2004 (first installment would have been due Sept. 15, 2003); and
4. a fiscal year ending Sept. 30, 2003 (last installment would have been due Sept 15, 2003).

If you have any questions about the new tax law, or any other tax matter, please give me a call at (562) 698-9891.

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