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Filing tax extension could reap benefits


Tax return extension is almost always the most advisable course of action for those with more complex tax issues.

Tax return extension is almost always the most advisable course of action for those with more complex tax issues.

One of the primary reasons is that in the last decade, Congress has quitefrequently enacted new laws that are retroactively applied. This year isno different.

Hopefully, veterinary practice owners planned ahead by filing 2001 taxreturn extensions. Those who did will be the best situated to take advantageof the recently enacted Job Creation and Worker Assistance Act of 2002.

Since Sept. 11, 2001, political debate has gone back and forth as topossible tax law changes resulting in business incentives that would maintaingross national product growth and reduce the portended effects of a recession.This new Act includes several changes that affect small businesses. Themost important of these relates to increased depreciation expense deductions.

New 30 percent allowance

For qualified tangible property placed in service after Sept. 10, 2001,an additional 30 percent special depreciation allowance applies for thefirst year the property was placed in service. As for all tax laws, manyexceptions and qualifications apply. For the most part, veterinary hospitalsthat purchased greater than $24,000 of tangible personal property in 2001and placed some of that property in service after Sept. 10, could benefitfrom the new rules.

Here are the highlights of qualifications and exceptions:

To be eligible for the new rules, the property must have been purchasedafter Sept. 10, 2001 and before Sept. 11, 2004, and placed in service afterSept. 10, 2001 and before Jan. 1, 2005.

If a binding contract to purchase the property existed before Sept. 11,2001, the property does not qualify for the special deduction, even if placedin service after Sept. 10.

The property must be defined as eligible for a recovery period of 20years or less. In general, this rule effectively excludes real estate andmost real estate improvements.

Certain qualified leasehold improvement property may be eligible.

Most computer software acquisitions (but not software that must be amortizedover 15 years as defined through Code Section 197) will qualify.

To qualify, listed property (such as vehicles) must be used more than50 percent for qualified business purposes.

The new 30 percent allowance rules do not apply to New York Liberty Zonequalified leasehold improvement property. Special rules apply that willnot be described here.

Other pre-existing laws governing depreciation deduction will affecthow the new 30 percent allowance is used. Any Section 179 expense deductionyour business has elected is taken into consideration before the 30 percentdepreciation allowance. Therefore, if your practice did not acquire morethan $24,000 worth of Section 179 eligible property in the 2001-year, youmay not need to compute any further. If you elect the maximum allowed Section179 election in this situation, the basis of acquired property will be reducedto zero before considering other depreciation guidelines. No additionaladvantage is gained from the new rules.

On the other hand, if your practice did acquire more than $24,000 ofequipment in the year, whether or not it fully uses the Section 179 election,then residual basis would be subject to the new rules, assuming that theproperty was acquired after Sept. 10.

Other credits must be considered before making the calculation. Theseinclude any deduction taken for the removal of barriers to the disabledand elderly. Also, disabled access credit would be considered before thecalculation is made.

Additional depreciation computation

The amount of additional first-year depreciation equals the sum of 30percent of the basis of the acquired property plus the amount of depreciationcomputed under the regular depreciation method on the remaining 70 percentof the basis, less the amount of depreciation that would have been computedon the entire basis under the regular depreciation method.

Take away the confusion

Confused? This is the usual status of income tax return preparation.A few examples help elucidate:

* Example 1:

You paid $60,000 for ultrasonography equipment on Dec. 13, 2001. Youcontracted to buy the equipment on Nov. 5, 2001. The equipment was alsoplaced in service (you are using it for ultrasound procedures) by Dec. 31.

The amount of depreciation deduction allowed is determined under themodified accelerated cost recovery system (MACRS). MACRS assigns specificrecovery periods and depreciation methods for different kinds of property.Medical equipment is generally classified as MACRS 5-year property, whichis depreciated over five years, using the double-declining balance method.

Without the additional first-year depreciation allowed by the Act, youcould deduct 20 percent of the acquisition cost of $60,000, or $12,000.The ultrasound equipment fits all the new law's criteria for additional2001 depreciation.

Under the new rules, without regard to the Section 179 election, youcould deduct $26,400.

· Step 1: $60,000 x 30% = $18,000

· Step 2: ($60,000 - $18,000) x 20% = $8,400

· Step 3: Add steps 1 and 2 together = $26,400

· Step 4: Less standard MACRS 5 depreciation allowed (oldrules) = ($12,000)

· Step 5: Balance equals total additional first-year depreciationto claim = $14,400

The new law allows an additional $14,400 depreciation, over and abovethe $12,000 allotted, or $26,400 in total. The additional first-year depreciationamounts to 24 percent of acquisition cost in this example, more than doublethan allowed under the old rules.

* Example 2:

Let's assume the same facts as in Example 1, except now you have purchasedan assortment of new reception room furniture, doctor office desks and otherqualified seven-year property. Without the additional first-year specialdepreciation, you would normally be entitled to deduct 14.29 percent ofthe $60,000 acquisition cost in the first year, or $8,574.

With the new rules, the calculation would be made as follows:

· Step 1: $60,000 x 30% = $18,000

· Step 2: ($60,000 - $18,000) x 14.29% = $ 6,002

· Step 3: Add steps 1 and 2 together=$24,002

· Step 4: Less standard MACRS 7 depreciation allowed, $60,000x 14.29% = ($8,574)

· Step 5: Balance equals total additional first-year depreciationto claim = $15,428

Thus, the total additional depreciation deduction that can be taken onthe seven-year property purchase of $60,000 is $15,428 for a grand totalof $24,002. The additional depreciation bonus is 25.7 percent of purchaseprice.

* Example 3:

What if you elected to also use the entire allowed Section 179 immediateexpensing election for this equipment acquisition? The 179 expense deductionis made before the computations are completed. The maximum 2001 Section179 allowance, assuming all criteria are met for full utilization, is $24,000.

Sixty thousand dollars ($60,000) of ultrasound equipment purchased less$24,000 of Section 179 election leaves a remaining basis subject to thenew rules of $36,000. Then we follow the same computations as before:

· Step 1: $36,000 x 30% = $10,800

· Step 2: ($36,000 - $10,800) x 20% = $ 5,040

· Step 3: Add steps 1 and 2 together = $15,840

Thus, the full deduction allowed on the equipment is $39,840, or 66.4percent of the total $60,000 acquisition cost. Under the old rules, thetotal of Section 179 and five-year MACRS would have only been $31,200 ofdeduction.

For all of the above examples, depreciation in later years will be reducedas a result of taking more depreciation deductions in the first year.

Bonus depreciation can be sidestepped

This first-year extra allowance applies to any qualified property unlessthe taxpayer makes an election to opt out. The election to not use the bonusdepreciation can be made for any class of property, for any tax year. Ifmade, the election applies to all property in that specific class placedin service during the tax year.

In some situations, you might choose to elect out of one or more classesfor a certain tax year. A good example is when your business is structuredas a Subchapter C corporation. If the C corporation has a net operatingloss that it wants to use first, it might not choose to use the extra deduction.

Also, you may be planning to change your Subchapter C corporation toSubchapter S by election. Such a plan usually avoids creating a net operatingloss that might be permanently lost as a future deduction. In this situation,you may decide to take the opting out election, so that bonus depreciationis not computed.

Be aware that when a taxpayer elects out of additional first-year depreciationfor a specific class of property, the taxpayer is subject to the alternativeminimum depreciation adjustment for all property in that class. These arecomplicated rules that will need your accountant's assistance.

2001 return amendment?

If you have already filed business tax returns for the 2001-year, andbelieve your practice may be subject to the more generous new depreciationrules, talk with your accountant. You may wish to amend returns to reflectthe additional deduction.

The new forms and instructions can be found on the IRS Web site at www.irs.gov.Check on the home page link, "New Law May Cut Your 2001 Tax."

What is not totally clear is whether you are required to file an amendedreturn. The recently revised (March 2002) instructions for Form 4562 toreport depreciation and amortization says in its general instructions, "Ifthese changes affect you, you should use the revised 2001 version of Form4562 for tax years beginning on 2000 or 2001. If you filed a tax return,you may have to file an amended return." Particularly given the factthat the bonus depreciation calculation automatically applied unless youspecifically elect out, we are not sure as to the requirements for taxpayerswho did file.

An amendment might be necessary to deduct the additional first-year depreciation.If not, a deduction might not be allowed in later years for the alloweddepreciation amount not deducted in the first year. Again, you should talkwith your accountant.

Keep in mind that more generous depreciation rules apply to certain propertyacquired after Sept. 10, 2001, and used in the area of New York City damagedby the terrorists' attacks.

Keep planning

Remember there are other reasons, other than law changes such as thisone, why extending tax returns may be one of the more important tax-planningmoves you make each year. In our experience, most taxpayers are anxiousto have their returns filed as soon as possible. As this most recent lawchange shows, those who procrastinate may have the best plan of all.

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