May 2002

Stimulate Your Clinic’s Economic Growth
What the Federal Economic Stimulus Package
Means for You and Your Practice
By Mark E. Battersby

As you’ve no doubt heard, President George W. Bush signed a long-sought-after economic stimulus package on March 9. The “Job Creation and Worker Assistance Act of 2002” (H.R. 3090), 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.

Most notably from a business perspective, the law provides tax incentives to help you expand and invest in your practice. Bush said these incentives “will mean more job opportunities for workers in every part of our country.”

Of particular interest to many chiropractors is a three-year, 30% depreciation boost when you invest in your practice, in keeping with specific guidelines. In another area, an increase in the two-year carryback for net operating losses to five years will provide infusions of previously paid taxes for any troubled chiropractic practice or business, especially since it includes a waiver of the 90% limitation against the alternate minimum tax.

More Depreciation
Chiropractic practices are now entitled to an additional first-year depreciation deduction equal to 30% 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% first-year depreciation deduction, it must be property with a recovery period of 20 years or less.

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

A similar deduction applies to leasehold improvements. Qualified leasehold improvement property is any improvement to an interior portion of a 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 be 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.

With 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 chiropractic practice. Legislators apparently intended that additional capital expenditures incurred to recondition or rebuild acquired property (or owned property) would satisfy this “original use” requirement.

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

A variation of the depreciation rules apply to new, so-called “luxury cars” under the new law. The current tax rules limit the annual depreciation deduction that can be taken for passenger automobiles to specified dollar amounts, indexed for inflation. Because of the 30% depreciation, luxury cars and other vehicles subject to the “cap” on depreciation will be able to claim an extra $4,600 (for a total of $7,660 in 2001 and 2002) in the year the vehicle is placed in service. The vehicle must be purchased between Sept. 11, 2001, and Sept. 10, 2004.

Alternative Minimum Tax
The Alternative Minimum Tax (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.

Temporary Loss Relief
Suddenly, losses have become a valuable commodity. Under the new tax rules, a net operating loss (NOL) is generally defined as the amount by which a business’ allowable deductions exceed gross income. Carrying back an NOL generally results in a refund of federal income tax for the carryback year, while a carryforward of an 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 for NOLs resulting from casualty or theft losses of individuals, those attributed to Presidentially-declared disasters, and for those engaged in farming or a small business (three-year carryback) - including many chiropractors.

A provision of the new law temporarily extends the general NOL carryback provision to five years (from two 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 chiropractor can choose to forego the five-year carryback period, the election, once made, is irrevocable. If a chiropractic practice does elect to forgo the five-year carryback period, then the losses are subject to the rules that would otherwise apply.

Those previously mentioned AMT tax rules clearly state that NOL deductions cannot reduce the alternative minimum taxable income (AMTI) by more than 90% 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% of the business’ AMTI.

Miscellaneous and Technical Provisions
In general, any chiropractic practice 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 it 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 Oct. 11, 2001.

Accounting Changes
Generally, those chiropractic practices 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.

Looking Back For Tax Refunds
There is a “bonus” contained in the new law that could benefit many chiropractic practices and other businesses. Within the law are significant retroactive depreciation changes that may affect tax returns that have already been filed for the 2001 tax year.

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 (IRS) 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 many chiropractors and their practices. Be sure you take full advantage of the many new provisions of this new tax law.

Mr. Battersby is a tax and financial advisor, freelance writer, and columnist based in Ardmore, Pa. He writes a syndicated weekly column focusing on tax issues for small businesses. He can be reached at mebatt12@earthlink.net or 610-789-2480.