Stimulating The Economy Of Your Sign Business
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Stimulating The Economy Of Your Sign Business

The new law that provides tax incentives to expand and invest in your business

By Mark Battersby

President Bush signed a long-sought-after economic stimulus package on Saturday, March 9, 2002. H.R. 3090, the "Job Creation and Worker Assistance Act of 2002," is a combination of business economic stimulus provisions, relief provisions for lower-Manhattan businesses affected by the 9/11 terrorist attacks, a 13-week extension of unemployment benefits, extensions for expired or soon-to-expire tax breaks and technical corrections.

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  • "We're seeing some encouraging signs in the economy, but we can't stand by and simply hope for continued recovery," President Bush said during the Rose Garden ceremony that included a live broadcast of his weekly radio address. "Today, we are acting to help workers, we're acting to create jobs and we're acting to strengthen our economy."

    More importantly for many sign professionals, the law also provides tax incentives to expand and invest in their businesses, which President Bush said, "will mean more job opportunities for workers in every part of our country.

    Of particular interest to many within the sign industry, however, may be a three-year, 30-percent "bonus" depreciation boost for businesses that invest in their operations. An increase in the two-year carryback for net operating losses to five years will provide infusions of previously paid taxes for many troubled sign shops and their suppliers, especially since it includes a waiver of the 90 percent limitation against the alternate minimum tax.

    More Depreciation
    In today's economy, few businesses are building new "plants or facilities." Fortunately, sign professionals are now entitled to an additional first-year depreciation deduction equal to 30 percent of the adjusted basis of qualified property such as equipment, some computer software costs and qualified leasehold improvements. Naturally, in order for any property to qualify for this additional 30-percent first-year depreciation deduction, it must be property with a recovery period of 20 years or less ≠- with a special exemption for normally longer-lived leasehold improvements.

    The depreciation rules (Section 167) clearly state that capitalized computer software costs, other than computer software to which Section 197 (acquired along with or as part of another business) applies, are recovered ratably over 36 months. Now, there is an additional first-year depreciation deduction equal to 30 percent of the expenditure.

    A similar deduction applies to leasehold improvements. Qualified leasehold improvement property is any improvement to an interior portion of a sign shop or other business building (provided certain requirements are met). The improvement must be made under or pursuant to a lease by the lessee (or sublessee) of the portion of the building that is to occupied exclusively by the lessee (or any sublessee). The improvement must be placed in service more than three years after the date the building was first placed in service.

    Qualified leasehold improvement property does not include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, any structural component benefiting a common area or the internal structural framework of the building.

    Whether equipment, software, leasehold improvements or any other type of property that qualifies for this unique additional first year write-off, the term "original use" means the first use to which property is put, whether or not it corresponds to the use of that property by the sign business. Getting technical, it is apparently intended that additional capital expenditures incurred to recondition or rebuild acquired property (or owned property) would satisfy the "original use" requirement.

    In order to qualify for this additional 30-percent, first-year depreciation deduction, the property must be acquired between September 10, 2001, and before September 11, 2004, and placed in service before January 1, 2005.

    How Does It Work?
    If a sign professional acquires qualifying property on June 1, 2002 at a cost of $200,000, that sign operation may claim a first-year depreciation "bonus" of 30 percent of the property's adjusted basis. That's a $60,000 deduction. If the property has a recovery period of 20 years, the sign operation's remaining basis in the property, $140,000, is recoverable over 20 years, starting with 2002 under the normal MACRS (Modified Asset Cost Recovery System) depreciation rules.

    Don't forget the small business expensing election under Code Section 179 of the current tax law. First year write-offs under Section 179 are $24,000 for 2001 and 2002. It's scheduled to rise to $25,000 in 2003. Property may qualify for both the 30 percent depreciation bonus and Section 179 expensing election. What's more, taxpayers in New York City's "Liberty Zone," will enjoy an even higher expensing election.

    The Alternative Minimum Tax (AMT)
    The AMT is a flat tax to ensure that corporate and high-income non-corporate taxpayers pay at least some tax, regardless of their deductions. However, as Congress created more and more "preference items" for inclusion in the AMT computation, more and more taxpayers, corporate and noncorporate found themselves enmeshed. Fortunately, this additional first-year depreciation deduction is allowed for both regular tax and AMT purposes for the year in which the property is placed in service.

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    Temporary Loss Relief
    Suddenly, losses have become an extremely valuable commodity. Under our tax rules, a net operating loss (NOL) is generally defined as the amount by which a sign professionalís allowable deductions exceed gross income. Carrying back a NOL generally results in a refund of Federal income tax for the carryback year while a carryforward of a NOL reduces the tax bill in the carryforward year.

    The present tax rules permit NOLs to be carried back two years and forward for up to 20 years with a few notable exceptions. A provision of the new law temporarily extends the general NOL carryback provision to five years (from 2 years) for NOLs arising in taxable years ending in 2001 or 2002. In addition, the five-year carryback period applies to NOLs from those years that now qualify for a three-year carryback period (i.e., NOLs arising from casualty or theft losses of individuals or attributable to certain Presidentially declared disaster areas).

    Although any sign professional can choose to forego the five-year carryback period, the election, once made, is irrevocable. If a sign business does elect to forgo the five-year carryback period, then the losses are subject to the rules that would otherwise apply.

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    Those dreaded alternative minimum tax rules clearly state that a sign professional's NOL deductions cannot reduce their alternative minimum taxable income (AMTI) by more than 90 percent of that AMTI. Under the new rules, however, an NOL deduction attributable to NOL carryforwards arising in taxable years ending in 2001 or 2002, as well as NOL carryforwards to these taxable years, can offset 100 percent of the sign business's AMTI.

    Miscellaneous & Technical Provisions

    S CORPORATION DEBT DISCHARGE INCOME
    In general, a sign business operating as an S corporation is not subject to the corporate income tax since it passes its items of income and loss along to its shareholders. To prevent double taxation of these items, each shareholder's basis in the stock of the S corporation is increased by the amount included in income and is decreased by the amount of any losses taken into account.

    The U.S. Supreme Court recently surprised many observers when they relied on the "plain language" of the tax law to find that although discharge of indebtedness income (DOI) ceases to be included in the gross income when the shareholder is insolvent, the tax law does not require that DOI ceases to be an item of income for purposes of allowing the shareholder an increase in basis that, in turn, can allow the pass-through of otherwise suspended corporate losses.

    The new law reverses the Supreme Court's decision, a decision that temporarily put S corporation shareholders at a decided advantage over other business entities, particularly partnerships, when hard times hit. Now, the discharged amount excluded from an S corporation's income is expressly not treated as an item of income by a shareholder. Consequently, the shareholder's basis is not increased. The new law applies to discharges of indebtedness income after October 11, 2001.

    ACCOUNTING CHANGES
    Generally, sign professionals and businesses using the accrual method of accounting may exclude from their income amounts from the performance of services that they anticipate will not be collected. Under the new law, the non-accrual experience method of accounting is available only for amounts to be received for the performance of qualified services (e.g., health, law, engineering, architecture, accounting, actuarial services, performing arts or consulting) and for services provided by some small businesses such as sign shops.

    Looking Back For Tax Refunds
    There is a "bonus" contained in the new law that will significantly benefit large numbers of sign professionals and other businesses. Within that law are significant retroactive depreciation changes that may affect tax returns that have already filed for tax year 2001. Other changes that may affect 2001 returns include the increased net operating loss (NOL) carryback period and the change for S corporation debt discharge income.

    The Internal Revenue Service will have to determine quickly how the retroactive provisions of the new law will be handled. In the meantime, the Job Creation and Worker Assistance Act of 2002, will benefit not only workers but sign professionals as well as other businesses that take full advantage of its provisions.

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