The Job Creation and Worker Assistance Act of 2002 made a number of changes to the tax law to offer short-term help to the unemployed and long-term stimulus to create jobs. Among its other provisions, the $40 billion measure

Allows additional 30% depreciation of certain capital assets for three years, starting Sept. 11, 2001 (perhaps requiring amended 2001 returns).

Extends various expiring tax provisions (for example, the work opportunity and electric-vehicle tax credits).

Permits a 13-week extension of unemployment benefits for employees whose regular benefits have terminated and who live in a state with a minimum 4% unemployment rate.

Enlarges the net operating loss carryback period from two years to five and waives alternative minimum tax depreciation.

Offers tax benefits for New York City reconstruction.

Congress introduced these changes in the expectation they would promote economic growth.

Another change. Among other issues, the act dealt with S corporation shareholders. Cancellation of debt (COD) income is excluded from an insolvent S corporation’s gross income. Hotly debated was whether a shareholder in an insolvent S corporation could nevertheless increase his stock basis by the amount of the excluded COD income.

Last year, the U.S. Supreme Court held, in Gitlitz, 531 US 206 (2001), that an S corporation shareholder could increase his stock basis in this manner. The act reversed the Court’s decision, providing that S corporation COD income does not increase shareholder basis. This rule applies to debt cancellations occurring after October 11, 2001.

IRS Errs on Small Business Returns

According to a recent General Accounting Office report, Tax Abatements: Better IRS Data Could Benefit Small Businesses and IRS (GAO-02-336), the IRS made 1.7 million tax return errors on small business returns in the 21/2-year period ending July 2001, costing taxpayers $18 billion, and leading to abatements (reductions of assessments for taxpayers’ accounts). Disturbingly, the IRS does not have sufficient data on who made the errors and why they occurred.

In 1999 the IRS established a “master file” of its tax abatements, but it is unable to pinpoint small businesses. Also missing are data explaining the effect of the errors on taxpayers and the IRS. The abatement data file was never distributed to officials in the IRS’s small business/self-employed division.

The GAO prepared the report at the request of Christopher S. Bond (R-Mo.), ranking member of the Senate Committee on Small Business and Entrepreneurship. It recommends the IRS conduct a cost-benefit analysis of improving existing data or collecting more on the volume, nature and burden of small business tax abatements. Further, the service should use any improved or additional data to reduce and eliminate the errors that trigger such abatements.

Thinking of Adopting?

Tax information is now available on the IRS Web site for adoptive parents. The IRS posted publication 968, Tax Benefits for Adoption, to www.irs.gov, in the “Forms & Pubs” section. The document explains two tax benefits available to offset adoption expenses. For taxpayers who recently have adopted, are in the process of adopting or are considering adopting, a tax credit may be available. Additionally, an exclusion from gross income may be available for benefits or payments a taxpayer receives from an employer’s adoption assistance program.

The free document also can be obtained by calling 800-TAX-FORM.