The recently enacted economic stimulus bill –– also known as the Job Creation and Worker Assistance Act of 2002 –– provides a number of important tax benefits for the capital-intensive construction industry.

Contractors that made large capital expenditures in the last part of 2001 or in early 2002, or that plan to make such purchases, should be sure to take full advantage of these benefits.

Perhaps the most significant benefit is "bonus depreciation" –– an additional first-year depreciation deduction equal to 30 percent of an eligible asset’s adjusted basis. To qualify for the bonus, an asset must be covered by the modified accelerated cost recovery system (MACRS) and must fall into one of the following categories:

• Property with a depreciable life of 20 years or less
  
  
• Water utility property
  
  
• Depreciable computer software
  
  
• Qualified leasehold improvement property (i.e., commercial real estate improvements made more than three years after the building was placed in service)

The property must be acquired –– or, for leasehold improvements, construction must begin –– between September 11, 2001, and September 10, 2004, and it must be placed in service before January 1, 2005.

The benefits can be substantial. Suppose that in July 2002 a contractor purchases $500,000 in construction equipment ordinarily depreciable over five years. The contractor can claim a 30-percent depreciation bonus ($150,000) in the first year plus regular first-year depreciation of $70,000 (20 percent of the remaining $350,000 basis). Total first-year depreciation is $220,000, or 44 percent of the equipment’s cost.

Contractors that qualify for Section 179 expensing can deduct an even higher percentage. Additional tax breaks are also provided to businesses in New York City’s "Liberty Zone."

Other provisions of interest to contractors include:

• The first-year depreciation limit for luxury cars is increased from $3,060 to $7,660 (for vehicles used more than 50 percent for business). The vehicle must be purchased between September 11, 2001, and September 10, 2004.
  
  
• Net operating losses for tax years ending in 2001 and 2002 may be carried back five years. Ordinarily, the NOL carryback period is two years (three years for certain casualty losses).
  
  
• The welfare-to-work and work opportunity tax credits are reinstated.
  
  
• Unemployment benefits are extended 13 weeks.

Careful Planning Required
Both bonus depreciation and extended NOL carrybacks can mean big tax savings for many contractors, but it’s important to evaluate these tax breaks in light of your overall tax situation. Some contractors will be better off under the regular depreciation and NOL provisions, but they must file a special election to obtain that treatment. Rules and procedures for making these elections are complex, so be sure to consult a tax advisor.