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by HowardSoft®

"Professional software at personal prices."

Spring 2002

¬ Special Edition on Retroactive Tax Breaks for 2001 Returns ¬

Bonus depreciation and more

As a result of the recently enacted Job Creation and Worker Assistance Act of 2002, most taxpayers qualify for an extra 30% first-year depreciation on new business property bought after September 10, 2001, and can file amended returns to claim it. Cars are included, and the limit on first-year depreciation on cars is raised as well. The IRS has revised Forms 2106 and 4562 for 2001 (and their instructions), which must be used to claim the new deductions.

A new release of Tax Preparer is now available with the revised Forms 2106 and 4562. It’s compatible with data created by all other releases of the season, so you can easily add the new claim to a previously prepared return. And for previously filed returns you can file an amended return with this new release following the steps explained in this newsletter.

The new release is included in our Archive 2002 CD-ROM. The final releases of Tax Preparer for the previous two years are also included, along with on-screen manuals for all three years, plus new on-screen instructions (Addendum 2002) for the revised release for 2001 returns. And, if you order the Standard or Premium Level update for next year, you also get on-screen versions of the latest IRS forms and publications for all three years.

2002 Tax Law affects 2001 Returns

New tax law forces IRS to revise 2001 forms.

The Job Creation and Worker Assistance Act of 2002, signed into law by the President on March 9, 2002, has a number of provisions that are retroactive to September 11, 2001 and therefore affect returns for tax year 2001. The fact that the regular tax season was already more than half completed and that the IRS would take a month to implement the changes did not deter Congress or the President. The IRS therefore had to revise Forms 2106 and 4562 and their instructions for 2001, and has instructed taxpayers to file an amended return if they are affected by the changes. The most prominent change is the addition of a bonus 30% first-year depreciation for new business property acquired Sept. 11, 2001 or later. But there are a number of other changes as well, detailed next. Most taxpayers will never be aware of the changes, but you can get a new release of Tax Preparer to handle the changes and benefit from the new law.

Overview of changes retroactive to 2001.

Provisions of the bill that affect 2001 returns include:

  • Addition of a 1st-year depreciation "bonus" of 30% for most new business property placed in service after September 10, 2001 and before September 11, 2004, excluding realty property. This includes cars, computers, office furniture, and most other tangible assets.
  • $4,600 increase in allowed 1st-year depreciation for vehicles, in concert with the bonus depreciation ($13,800 for qualified OEM electric vehicles). This raises the limit to $7,660 for cars used 100% in business ($23,080 for qualified OEM electric vehicles).
  • Increase in Net Operating Loss (NOL) carryback period from 2 years to 5 years for net operating losses arising in tax year 2001 or 2002.
  • Full allowance against AMT income for NOL carryback and carryforward into 2001 and 2002 (vs. 90% allowance normally).
  • Additional benefits for activities in the IRS-defined New York Liberty Zone (lower Manhattan) include:
    • Extension of the 30% bonus depreciation to rehabilitation or replacement of nonresidential real and residential rental property damaged by the Sept. 11, 2001 terrorist attacks,
    • raising from $24,000 to as much as $59,000 the limitation on section 179 deductions, and
    • using only half the cost of such property in applying the $200,000 limit on total cost of sec. 179 property for which a deduction is taken.


FREE Archive 2002 CD-ROM

We are once again offering an end-of-season CD-ROM that consolidates three years of Tax Preparer and its on-screen manuals onto a single CD-ROM. And it includes the newly revised forms to claim the 30% bonus depreciation. Use it to file extension returns for tax year 2001 and amended returns for tax years 2001, 2000, and 1999 (corresponding to all the programs you order for next year). And if you order the Standard or Premium Level you’ll get numerous IRS forms and publications for all 3 years as well.

Get it FREE if you order your update

for next year by May 31, 2002.

Use the Advance Order Form in this newsletter, call 1-800-24-TAXES, or order at

Details of the new "bonus" depreciation

How it works.

The new first-year depreciation allowance is available in addition to the traditional first-year depreciation provided by sec. 179 deductions. The property must generally be tangible property with a recovery period of 20 years or less and must be used more than 50% for business. For qualifying property there are now three types of depreciation available in the first tax year of use, computed in the following order:

  • Sec. 179 deduction. Compute this deduction first, but no more than the business portion of the cost.
  • Bonus depreciation. Recompute the basis of the property as the business/investment portion of the cost less the sec. 179 deduction taken. Compute the special 30% allowance on this adjusted basis.
  • MACRS depreciation. Recompute the basis again as the preceding adjusted basis less the bonus depreciation taken. Compute MACRS depreciation on this new adjusted basis.

Remember that the limitation on cars is raised for those cars for which the "bonus" depreciation is claimed. Whereas the normal limitation on first-year depreciation of cars is $3,060 for tax year 2001 ($9,280 for OEM electric vehicles), the limitation for cars for which the "bonus" depreciation is claimed is $7,660 ($23,080 for OEM electric vehicles).

How it impacts IRS Forms 2106 and 4562.

The IRS has revised both Form 2106 and Form 4562 in response to the new law, but the approaches taken for the two forms are miles apart. For Form 2106 the IRS has handled the changes almost exclusively in the instructions by expanding the meaning of line 31 of Form 2106 to include the new bonus depreciation. By contrast, for Form 4562 the IRS has handled the changes by adding two new lines and rearranging several others, even changing the order of some lines and moving them to different sections – a confusing set of changes to say the least! Special end-of-season releases of Tax Preparer (2002.03 and later) are based on these new forms and instructions, and allow you to file a return under the new rules even though you may have started the return with a prior release. The new releases are included in the Archive 2002 CD-ROM. Alternatively, you can update your installed software from the internet at:

You’ll also find there an important on-screen Addendum, which provides additional details on the new law and complete instructions for the revised Forms 2106 and 4562.

California software affected too! Because you normally start a California return using the translate feature on the Federal data, you must use a new release of the California Supplement so that the new Form 4562 is properly translated. The new release (ca2002.03) can recognize which Form 4562 format has been used for the return, but no prior release can handle the new format. It is therefore imperative that you update your California Supplement software if you update your Federal software, or else a return altered using the Federal software will not be properly translated.


Filing an Amended Return for 2001

Why file an amended return.

Nearly anyone who acquired new business property after Sept. 10, 2001 is eligible for the new bonus depreciation. However, you can claim the new provision only on the new forms, so you must file an amended return (Form 1040X) to make the claim if you already filed using the old Forms 2106 and 4562. (Strictly, the law requires you to take the bonus depreciation when it applies unless you specifically elect not to for that class of property. You make this election merely by attaching a statement to your return identifying which classes of property you elect not to claim the bonus depreciation. However, the IRS is evidently enforcing that rule only for those who file using the new forms. All others are instructed by the IRS to file an amended return only to claim the new bonus depreciation.)

How to do it with Tax Preparer.

Filing an amended return is easy with Tax Preparer, but you must follow the proper procedure in order to make the completion of Form 1040X fully automatic:

Step 1: Using release 2002.03 or later, make a copy of the return as filed then immediately access Form 1040X. Form 1040X will then have column A of the form already completed for you.

Step 2: Next access Form 2106 or 4562 and make the claim for the special 30% allowance on the appropriate worksheet. You must use the worksheets to make the claims, following the instructions in our on-screen Addendum 2002 manual.

Step 3: Return to Form 1040X and you will see that columns B and C of Form 1040X are now complete. You must now explain the reason for the amended return in a supporting statement for Part II (on the last screen of Form 1040X).

The return is now complete and ready to file. Remember that along with a signed Form 1040X you must include all forms that have changed in any way as a result of the new claim.

Professional e-file

Call for details.

Because Nelco is discontinuing the products for which we design our e-file add-on, we will be partnering with a different e-file company next year. We do not yet have details, but if you let us know you are interested we’ll notify you as soon as we have more information, including pricing options. Remember, you must have a valid EFIN issued by the IRS via Form 8633 in order to file under this program.