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Publication 3991 (5-2002) HIGHLIGHTS OF THE JOB CREATION AND WORKER ASSISTANCE ACT OF 2002


Publication 3991 (5-2002)

DATED
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  • Institutional Authors
    Internal Revenue Service
  • Jurisdictions
  • Language
    English
Citations: Publication 3991 (5-2002)
[Editor's Note:

[Editor's Note: Due to the size of this chart, it was necessary to divide it into three parts. The first column is repeated in each part.]

]

1. Tax Changes for Individuals

 

2. Tax Changes for Businesses

 

3. IRAs and Other Retirement Plans

 

4. Car Expenses

 

5. Depreciation

 

6. How To Get Tax Help Introduction

All of the changes discussed in this publication resulted from the Job Creation and Worker Assistance Act of 2002. This publication highlights tax law changes that took effect retroactively for 2001 and others that take effect in 2002 and later years. The chapters are divided into separate sections based on when the changes take effect.

For example, this publication covers the following topics.

 

• Tax benefits for the area of New York City damaged in terrorist attacks on September 11, 2001.

• New deduction available for educator expenses.

• Limit on the use of the non-accrual experience method of accounting.

• Pension changes such as the new tax credit for certain pension plan startup costs, an increased SEP contribution limit, figuring 403(b) catch-up contributions, and a provision for deemed IRAs.

• Extension of the welfare-to-work credit and work opportunity credit.

• New 5-year carryback rule for net operating losses (NOLs).

 

See the discussion of each topic for more information.

Certain changes had a major effect on two of the publications we issued for 2001. We published supplements to those two publications and they have been included in this publication as follows.

 

• Chapter 4 contains the supplement to

,

Travel, Entertainment, Gift, and Car Expenses.

This discusses the increase in the amount of depreciation deduction for certain automobiles.

• Chapter 5 contains the supplement to Publication 946, How To Depreciate Property. This discusses the special depreciation allowance for property acquired after September 10, 2001.

 

Adjusting your withholding or estimated tax payments for 2002.

If your tax for 2002 will be more or less than your 2001 tax, you may need to adjust your withholding or estimated tax payments accordingly. If your tax will decrease, you can get the benefit of lower taxes throughout the year. If you will owe more tax, you can avoid a penalty when you file your tax return.

See the following table for forms and publications that will help you adjust your withholding or estimated tax payments. See chapter 6 for information on ordering forms and publications.

  To adjust your....   Get Form...                   And Publication...

 

  Withholding          

W-4,

Employee's Withholding  

919

,

How Do I Adjust

 

                       Allowance Certificate

         

My Tax Withholding?

 

 

  Estimated tax        

1040-ES,

 

Estimated Tax for  

505

,

Tax Withholding

 

  payments            

Individuals

                   

and Estimated Tax

 

 

Photographs of missing children.

The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling

1-800-THE-LOST (1-800-843-5678)

if you recognize a child.

Comments and suggestions. We welcome your comments about this publication.

You can e-mail us while visiting our web site at http://www.irs.gov .

   You can write to us at the following address:

 

      Internal Revenue Service

 

      Technical Publications Branch

 

      W:CAR:MP:FP:P

 

      1111 Constitution Ave. NW

 

      Washington, DC 20224

 

 

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

1. Tax Changes for Individuals

2001 Changes

New 5-Year Carryback Rule for Net Operating Losses (NOLs)

If you have an NOL from a tax year ending during 2001 or 2002, you must generally carry back the entire amount of the NOL to the 5 tax years before the NOL year (the carryback period). However, you can still choose to use the previous carryback period. You also can choose not to carry back an NOL and only carry it forward.

Individuals, estates, and trusts can file Form 1045, Application for Tentative Refund. The instructions for this form will be revised to reflect the new law.

Wash Sale Rules Do Not Apply to Section 1256 Contracts

The wash sale rules that generally apply to losses from the sale of stock or securities, do not apply to any loss arising from a section 1256 contract.

A section 1256 contract is any:

 

• Regulated futures contract,

• Foreign currency contract,

• Nonequity option,

• Dealer equity option, or

• Dealer securities futures contract.

 

Wash sales and section 1256 contracts are explained in detail in

Publication 550

,

Investment Income and Expenses.

Other 2001 Changes

Other changes are discussed in the following chapters.

 Chapter 4     Car Expenses

 

 Chapter 5     Depreciation

 

 

 

2002 Changes

 

 

 

 

Deduction for Educator Expenses

   

 

 

If you are an eligible educator, you can deduct as an adjustment to income up to $250 in qualified expenses. You can deduct these expenses even if you do not itemize deductions on Schedule A (Form 1040). This adjustment to income is for expenses paid or incurred in tax years beginning during 2002 or 2003. Previously, these expenses were deductible only as a miscellaneous itemized deduction subject to the 2% of adjusted gross income limit.

Eligible educator. You are an eligible educator if, for the tax year, you meet the following requirements.

 

1) You are a kindergarten through grade 12:

 

a) Teacher,

b) Instructor,

c) Counselor,

d) Principal, or

e) Aide.

 

2) You work at least 900 hours during a school year in a school that provides elementary or secondary education, as determined under state law.

 

Qualified expenses.

These are unreimbursed expenses you paid or incurred for books, supplies, computer equipment (including related software and services), other equipment, and supplementary materials that you use in the classroom. For courses in health and physical education, expenses for supplies are qualified expenses only if they are related to athletics.

To be deductible as an adjustment to income, the qualified expenses must be more than the following amounts for the tax year.

 

• The interest on qualified U.S. savings bonds that you excluded from income because you paid qualified higher education expenses,

• Any distribution from a qualified tuition program that you excluded from income, or

• Any tax-free withdrawals from your Coverdell education savings account.

 

Personal Credits Still Allowed Against Alternative Minimum Tax

The provision that allowed certain nonrefundable personal credits to reduce both your regular tax and any alternative minimum tax (AMT) has been extended and will be in effect for 2002 and 2003. This provision, as it applies to the AMT, was originally scheduled to expire after 2001. Without the extension, these credits could not have been used to reduce any AMT in 2002 or 2003.

Later Change

Child and Dependent Care Expenses

For the purpose of figuring the child and dependent care credit, your spouse is treated as having at least a minimum amount of earned income for any month that he or she is a full-time student or not able to care for himself or herself. Beginning in 2003, this amount is increased to $250 a month if there is one qualifying person and to $500 a month if there are two or more qualifying persons. Before 2003, the amounts were $200 and $400. The same rule applies for the exclusion of employer-provided dependent care benefits. For more information about the credit and exclusion, see Publication 503, Child and Dependent Care Expenses.

2. Tax Changes for Businesses

2001 Changes

New 5-Year Carryback Rule for Net Operating Losses (NOLs)

If you have an NOL from a tax year ending during 2001 or 2002, you must generally carry back the entire amount of the NOL to the 5 tax years before the NOL year (the carryback period). However, you can still choose to use the previous carryback period. You also can choose not to carry back an NOL and only carry it forward.

Individuals, estates, and trusts can file Form 1045, Application for Tentative Refund. Corporations can file Form 1139, Corporation Application for Tentative Refund. The instructions for these forms will be revised to reflect the new law.

Electronic Form 1099

For tax years ending after March 9, 2002, most Forms 1099 can be furnished electronically if the recipient consents, according to IRS regulations, to receive it that way.

Tax Incentives for New York Liberty Zone

New tax benefits are provided for the parts of New York City damaged in the terrorist attacks on September 11, 2001. These benefits apply to the newly created New York Liberty Zone, which is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway), in the Borough of Manhattan.

Tax benefits for the New York Liberty Zone include the following.

 

• A special depreciation allowance equal to 30% of the adjusted basis of qualified Liberty Zone property. It is allowed for the year the property is placed in service.

• No alternative minimum tax depreciation adjustment for qualified Liberty Zone property.

• Classification of Liberty Zone leasehold improvement property as 5-year property.

• Authorization of the issuance of tax-exempt New York Liberty bonds to finance the acquisition, construction, reconstruction, and renovation of nonresidential real property, residential rental property, and public utility property in the Liberty Zone.

• An increased section 179 deduction for certain Liberty Zone property.

• Extension of the replacement period from 2 years to 5 years for certain property involuntarily converted as a result of the terrorist attacks on September 11, 2001, but only if substantially all of the use of the replacement property is in New York City. For more information about involuntary conversions, see Postponement of Gain in Publication 547, Casualties, Disasters, and Thefts.

 

In addition, for 2002 and 2003, the work opportunity credit is expanded by creating a new targeted group, consisting generally of employees who work in the Liberty Zone or, in certain cases, in New York City outside the Liberty Zone. For more information, see

Work Opportunity Credit Expanded in New York Liberty Zone

under

2002 Changes

, later.

For more information about the 30% special depreciation allowance, Liberty Zone leasehold improvement property, or increased section 179 deduction, see New York Liberty Zone Benefits , in chapter 5. In addition, the tax benefits for the Liberty Zone will be covered in a new edition of Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities, available later in 2002.

Other 2001 Changes

Other changes are discussed in the following chapters.

 Chapter 4     Car Expenses

 

 Chapter 5     Depreciation

 

 

 

2002 Changes

 

 

 

 

Nonaccrual-Experience Method

   

 

 

Under current law, if you perform services and use an accrual method of accounting, you do not accrue income which, based on experience, you expect to be uncollectible. Beginning in 2002, this rule only applies if you perform services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, and consulting, or your average annual gross receipts for the 3 prior tax years does not exceed $5,000,000. As under current law, the nonaccrual-experience method will not apply to amounts on which you charge interest or a late payment penalty. For more information, see

Nonaccrual-Experience Method

in chapter 11 of

Publication 535

,

Business Expenses.

Issuance of Qualified Zone Academy Bonds

State and local governments issue qualified zone academy bonds to raise funds for the use of qualified zone academies. The amount of bonds that may be issued was limited to $400 million each year for 1998, 1999, 2000, and 2001. This provision has been extended to provide for an additional $400 million of bonds to be issued each year for 2002 and 2003. For more information about qualified zone academy bonds, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities.

Depletion

The suspension of the taxable income limit on percentage depletion from the marginal production of oil and natural gas that was scheduled to expire for tax years beginning after 2001 has been extended to tax years beginning before 2004. For more information on marginal production, see section 613A(c) of the Internal Revenue Code.

Work Opportunity Credit Expanded in New York Liberty Zone

The work opportunity credit is expanded to include a new targeted group consisting generally of employees who perform substantially all their services:

 

• In the New York Liberty Zone (defined earlier under

Tax Incentives for New York Liberty Zone,

under

2001 Changes

), or

• Elsewhere in New York City for a business that relocated from the Liberty Zone due to the destruction or damage of its place of business by the September 11, 2001, terrorist attack. The credit is available to employers for wages paid to new employees and existing employees for work performed during 2002 or 2003. Certain limits apply. For more information about the work opportunity credit, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities.

 

Credit For Pension Plan Startup Costs

The credit for pension plan startup costs is now allowed for plans that become effective after December 31, 2001. Previously, the credit was only allowed for plans established after December 31, 2001. For more information on the credit, see Important Changes for 2002 in Publication 560, Retirement Plans for Small Business .

Welfare-to-Work Credit Extended

The welfare-to-work credit that was scheduled to expire for wages paid to individuals who began working for you after 2001 has been extended to include wages paid to qualified individuals who begin work for you in 2002 or 2003. For more information on the welfare-to-work credit, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities.

Work Opportunity Credit Extended

The work opportunity credit that was scheduled to expire for wages paid to individuals who began working for you after 2001 has been extended to include wages paid to qualified individuals who begin work for you in 2002 or 2003. For more information about the work opportunity credit, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities.

Electric and Clean-Fuel Vehicles

The maximum clean-fuel vehicle deduction and qualified electric vehicle credit were scheduled to be 25% lower for 2002 and both were scheduled to be phased out completely by 2005. The full deduction and credit are now allowed for qualified property placed in service in 2002 and 2003. The phaseout of the deduction and the credit will begin in 2004, and no deduction or credit will be allowed for property placed in service after 2006. For more information about electric and clean-fuel vehicles, see chapter 12 in Publication 535, Business Expenses.

Renewable Electricity Production Credit

The renewable electricity production credit is extended to include electricity produced by facilities placed in service after 2001 and before 2004.

Later Changes

Special Depreciation Allowance

You can claim the special depreciation allowance (an additional 30% depreciation deduction) for new property that you acquire before September 11, 2004, and place in service for your business generally before January 1, 2005, if you meet the other requirements for qualified property covered in chapter 5. Accordingly, you will generally no longer be able to claim the special depreciation allowance for the qualified property if you acquire it after September 10, 2004, or place it in service for your business after December 31, 2004. However, you will be able to claim the special Liberty Zone depreciation allowance (an additional 30% depreciation deduction) for most qualified property if you place it in service in the Liberty Zone after December 31, 2004, and generally before January 1, 2007, provided you meet the other requirements for qualified Liberty Zone property covered in chapter 5.

Extension of Placed in Service Date

To qualify for the special depreciation allowance, your property must meet certain tests, including the placed in service date test, as well as the other requirements covered in chapter 5 of this publication. To meet the placed in service date test, your property must generally be placed in service for use in your trade or business or for the production of income after September 10, 2001, and before January 1, 2005. However, certain property placed in service before January 1, 2006, may meet this test. Transportation property and property with a recovery period of 10 years or longer meet the test if one of the following applies.

 

• The property has an estimated production period of more than 2 years.

• The property has an estimated production period of more than 1 year and it costs more than $1 million.

 

Transportation property is any tangible personal property used in the trade or business of transporting persons or property.

For property that qualifies for the special depreciation allowance solely because of the one-year extension of the placed in service date, only the part of the basis attributable to manufacture, construction, or production before September 11, 2004, is eligible for the special depreciation allowance.

Special Liberty Zone Depreciation Allowance for New and Used Property

You can claim the special Liberty Zone depreciation allowance (an additional 30% depreciation deduction) for used property that you acquire after September 10, 2001, if the property meets the requirements listed under Qualified Liberty Zone Property in chapter 5 of this publication. You will be able to claim the allowance for both new and used property that you acquire after September 10, 2004, provided the property meets the other requirements for qualified Liberty Zone property.

Depreciation of Property Used on Indian Reservations

The special depreciation rules that apply to qualified property used on an Indian reservation were scheduled to expire for property placed in service after 2003. These special rules have been extended to include property placed in service in 2004. For more information about these rules, see Publication 946, How To Depreciate Property.

Indian Employment Credit Extended

The Indian employment credit that was scheduled to expire for tax years beginning after 2003 has been extended to include a tax year beginning in 2004. For more information about this credit, see Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities.

3. IRAs and Other Retirement Plans

2002 Changes

Simplified Employee Pensions (SEPs)

Contribution limit increased. For plan years beginning after December 31, 2001, the annual limit on the amount of employer contributions to a SEP increases to the lesser of the following amounts.

 

• 25% of an eligible employee's compensation.

• $40,000 (subject to cost-of-living adjustments after 2002).

 

Deduction limit.

For years beginning after 2001, the following changes apply to the SEP deduction limit.

Elective deferrals (SARSEPs). Elective deferrals under a SARSEP are not subject to the deduction limit that applies to employer contributions. Also, elective deferrals are not taken into account when figuring the amount you can deduct for employer contributions that are not elective deferrals.

Definition of compensation. Compensation for figuring the deduction for employer contributions includes elective deferrals under a SARSEP.

More information. For more information about SEPs, see Publication 560, Retirement Plans for Small Business.

403(b) Plans

Figuring catch-up contributions. When figuring allowable catch-up contributions, combine all contributions made by your employer on your behalf to the following plans.

 

• Qualified retirement plans.

• 403(b) plans.

• Simplified employee pensions (SEP).

• SIMPLE plans.

 

The total amount of the catch-up contributions to all plans maintained by your employer cannot exceed the annual limit. For 2002, the limit is $1,000.

Rollovers to and from 403(b) plans. If a distribution includes both pre-tax contributions and after-tax contributions, the portion of the distribution that is rolled over is treated as consisting first of pre-tax amounts (contributions and earnings that would be includible in income if no rollover occurred). This means that if you roll over an amount that is at least as much as the pre-tax portion of the distribution, you do not have to include any of the distribution in income.

Years of service for church employees and ministers. If you are a minister or church employee, treat all of your years of service as an employee of a church or a convention or association of churches as years of service with one employer. Prior law required church employees and ministers to figure years of service separately for each employer.

As a minister or church employee, all contributions made to 403(b) plans on your behalf, as an employee of a church or a convention or association of churches, are considered made by one employer.

Foreign missionaries. If you are a foreign missionary, contributions to your 403(b) account will not be treated as exceeding the limit on annual additions if the contributions are not more than the greater of:

 

• $3,000, or

• Your includible compensation.

 

More information.

For more information about 403(b) plans, see

Publication 571

,

Tax-Sheltered Annuity Plans (403(b) Plans)

.

Later Change

Deemed IRAs

For plan years beginning after 2002, a qualified employer plan can provide for voluntary employee contributions to a separate account or annuity that is deemed to be an IRA.

For this purpose, a qualified employer plan includes a deferred compensation plan (section 457(b) plan) maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state.

The term qualified employer plan also includes:

 

• A qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan),

• A qualified employee annuity plan (section 403(a) plan), and

• A tax-sheltered annuity plan (section 403(b) plan).

 

More information about IRAs can be found in

Publication 590

,

Individual Retirement Arrangements (IRAs).

4. Car Expenses

If you purchased a car after September 10, 2001, for use in your business (or as an employee) and figure your deductible expenses using the actual car expense method, new law contains provisions that may affect your depreciation deduction for that car.

Publication 463 does not contain the new provisions because it was printed before the law was enacted. The new provisions are in the Supplement to Publication 463, which is reprinted below.

!CE Supplement to Publication 463

 

Travel, Entertainment, Gift, and Car Expenses

 

 

Introduction

This supplemental publication is for taxpayers who purchased a car for business purposes after September 10, 2001, and figure their deductible expenses, including a deduction for depreciation, using the actual car expense method.

After

 

1) A new depreciation deduction, the special depreciation allowance.

2) An increase in the limit on depreciation for any car for which you claim the new special depreciation allowance.

 

If you have already filed your 2001 return, you may wish to file an amended return to claim any of these benefits. See

Amended Return

, later.

Depreciation of Car

If you used the actual car expense method to figure your deduction for a car you own and use in your business (or as an employee), you generally can claim a depreciation deduction. However, there is a limit on the depreciation deduction you can take for your car each year. See Depreciation Limit later.

Special Depreciation Allowance

The new law allows you to claim a special depreciation allowance. This special allowance is a deduction equal to 30% of the depreciable basis of qualified property. You figure the amount of the special depreciation allowance after any section 179 deduction you choose to claim, but before figuring your regular depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS). See Depreciation Deduction under Actual Car Expenses in chapter 4 of

 

1) You bought it new.

2) You bought it after September 10, 2001. (But a car is not qualified property if a binding written contract for you to buy the car was in effect before September 11, 2001.)

3) You began using it for business after September 10, 2001, and used it more than 50% in a qualified business use.

 

Example.

Bob bought a new car on October 15, 2001, for $20,000 and placed it in service immediately, using it 75% for business. Bob's car is qualified property.

Bob chooses not to take a section 179 deduction for the car. He does claim the new special depreciation allowance. Bob first must figure the car's depreciable basis, which is $15,000 ($20,000 X .75). He then figures the special depreciation allowance of $4,500 ($15,000 X .30).

The remaining depreciable basis of $10,500 ($15,000 - $4,500) is depreciated using MACRS (200% declining balance method, half-year convention) and results in a deduction of $2,100 ($10,500 X .20), for a total depreciation deduction for 2001 of $6,600 ($4,500 + $2,100). However, Bob's depreciation deduction is limited to $5,745 ($7,660 X .75), as discussed next.

Depreciation Limit

The limit on your depreciation deduction for 2001 is increased to $7,660 for a car that is qualified property (defined above) and for which you claim the special depreciation allowance. The limit is increased to $23,080 if the car is an electric car. The section 179 deduction is treated as depreciation for purposes of this limit.

If you use a car less than 100% in your business or work, the limit is $7,660 (or $23,080 for an electric car) multiplied by the percentage of business and investment use during the year.

For cars that do not qualify for (or for which you choose not to claim) the special depreciation allowance, the limit remains $3,060 ($9,280 for electric cars).

Amended Return

If you filed your 2001 calendar year return before June 1, 2002, and did not claim the new special depreciation allowance for a qualified car, you can claim it by filing an amended return on Form 1040X, Amended U.S. Individual Income Tax Return, by April 15, 2003. At the top of the Form 1040X, print "Filed pursuant to Revenue Procedure 2002-33." If you are an employee, attach Form 2106, Employee Business Expenses (revised March 2002). If you are self-employed, attach Form 4562, Depreciation and Amortization (revised March 2002).

Or, you can claim the special depreciation allowance by filing Form 3115, Application for Change in Accounting Method, with your 2002 return. For details, see Revenue Procedure 2002-33. (But, filing Form 1040X for 2001 enables you to claim the special allowance earlier than attaching Form 3115 to your 2002 return.)

You cannot claim the special depreciation allowance on an amended return (or by using Form 3115) if you made, or are treated as having made, the election not to claim it described later.

Example. The facts are the same as in the previous example except that Bob filed his original 2001 income tax return on April 15, 2002, and claimed a $3,000 ($20,000 x .75 x .20) depreciation deduction for his new car using MACRS.

Bob now wishes to claim the special depreciation allowance for his new car on an amended 2001 return. Bob, who is an employee, files Form 1040X, by April 15, 2003, with an updated Form 2106 (revised March 2002) attached, increasing his total depreciation deduction to $5,745, as figured in the earlier example.

Bob's new filled-in Form 2106 is shown later.

 

The following graphic has been omitted:

 

Bob Smith's Form 2106

 

 

Election Not To Claim Special Allowance

You can elect not to claim the special depreciation allowance for a car by making a statement attached to, or written on, your return indicating that you are electing not to claim the special depreciation allowance for 5-year property. As a general rule, you must make this election by the due date (including extensions) of your return.

You can have an automatic extension of 6 months from the due date of your return (excluding extensions) to make the election with an amended return. To get this extension, you must have filed your original return by the due date (including extensions). At the top of the statement, print "Filed pursuant to section 301.9100-2."

If you elect not to claim the special depreciation allowance for a car, you cannot claim it for any other 5-year property placed in service during the same year.

Unless you elect (or are treated as electing) not to claim the special depreciation allowance, you must reduce the car's adjusted basis by the amount of the allowance, even if the allowance was not claimed.

Deemed election for return filed before June 1, 2002. If you did not make the election not to claim the special depreciation allowance in the time and manner described above, you will still be treated as electing not to claim it if all of the following apply.

 

1) You filed your 2001 return before June 1, 2002.

2) You claimed depreciation on your return but did not claim the special depreciation allowance.

3) You did not file an amended 2001 return by April 15, 2003, or a Form 3115 with your 2002 return, to claim the special depreciation allowance.

 

5. Depreciation

If you depreciate business property that you acquired and placed in service after September 10, 2001, new law contains provisions that may affect your depreciation deduction for that property.

Publication 946, How To Depreciate Property, contains information on depreciation. However, Publication 946 does not contain the new provisions because it was printed before the law was enacted. The new provisions are in the Supplement to Publication 946, which is reprinted below.

!CE Supplement to Publication 946

 

How To Depreciate Property

 

 

Introduction

After Publication 946 was printed, the Job Creation and Worker Assistance Act of 2002 was signed into law by the President. The new law made several changes in the tax rules explained in the publication. Some of the changes apply to property placed in service during 2001. This supplemental publication describes those changes and explains what you should do if you are affected by them.

The situations and examples in Publication 946 do not reflect any of the changes made by the Job Creation and Worker Assistance Act of 2002.

The new law contains the following provisions.

 

• 30% depreciation deductions (special depreciation allowance and special New York Liberty Zone (Liberty Zone) depreciation allowance) for the year qualified property is placed in service after September 10, 2001.

• An increased dollar limit on the section 179 deduction for qualified Liberty Zone property purchased after September 10, 2001.

• A shorter recovery period for qualified Liberty Zone leasehold improvement property placed in service after September 10, 2001.

• An increase in the maximum depreciation deduction for 2001 for a qualified passenger automobile placed in service after September 10, 2001.

 

If you believe you qualify for an increased deduction under any of these new rules, you must file the revised 2001 Form 4562 (dated March 2002) for 2001 calendar or fiscal years and 2000 fiscal years ending after September 10, 2001. If you have already filed a tax return, this supplemental publication explains how to claim these benefits and how to elect

not

to claim the special depreciation allowance or special Liberty Zone depreciation allowance. See

Table 2

at the end of the supplement for an overview of the rules that apply if you filed your return before June 1, 2002.

Special Depreciation Allowance

You can take a special depreciation allowance for qualified property you place in service after September 10, 2001. The allowance is an additional deduction of 30% of the property's depreciable basis. To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property. See What Is the Basis for Depreciation? on page 23 in Publication 946 for more information on figuring depreciable basis.

The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. In the year you claim the allowance (generally the year you place the property in service), you must reduce the depreciable basis of the property by the allowance before figuring your regular depreciation deduction.

Example 1. On November 1, 2001, you bought and placed in service in your business qualified property that cost $100,000. You did not elect to claim a section 179 deduction. You can deduct 30% of the cost ($30,000) as a special depreciation allowance for 2001. You use the remaining $70,000 of cost to figure your regular depreciation deduction for 2001 and later years.

Example 2. The facts are the same as in Example 1, except that you choose to deduct $24,000 of the property's cost as a section 179 deduction. You use the remaining $76,000 of cost to figure your special depreciation allowance of $22,800 ($76,000 X 30%). You use the remaining $53,200 of cost to figure your regular depreciation deduction for 2001 and later years.

Qualified Property

To qualify for the special depreciation allowance, your property must meet the following requirements.

 

1) It is new property of one of the following types.

 

a) Property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less. See

Can You Use MACRS To Depreciate Your Property

and

Which Recovery Period Applies?

on pages 7 and 23, respectively, in

Publication 946

.

b) Water utility property. See 25-year property on page 22 in Publication 946.

c) Computer software that is not a section 197 intangible as described in Computer software on page 5 in Publication 946. (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS.)

d) Qualified leasehold improvement property (defined later).

 

2) It meets the following tests (explained later under

Tests To Be Met

).

 

a) Acquisition date test.

b) Placed in service date test.

c) Original use test.

 

3) It is

not

excepted property (explained later under

Excepted Property

).

 

Qualified leasehold improvement property.

Generally, this is any improvement to an interior part of a building that is nonresidential real property, provided all of the following requirements are met.

 

• The improvement is made under or pursuant to a lease by the lessee (or any sublessee) or the lessor of that part of the building.

• That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part.

• The improvement is placed in service more than 3 years after the date the building was first placed in service.

 

However, a qualified leasehold improvement does not include any improvement for which the expenditure is attributable to any of the following.

 

• The enlargement of the building.

• Any elevator or escalator.

• Any structural component benefiting a common area.

• The internal structural framework of the building.

 

Generally, a binding commitment to enter into a lease is treated as a lease and the parties to the commitment are treated as the lessor and lessee. However, a binding commitment between related persons is not treated as a lease.

Related persons. For this purpose, the following are related persons.

 

• Members of an affiliated group.

• The persons listed in items (1) through (9) under Related persons on page 8 of Publication 946 (except that "80% or more" should be substituted for "more than 10%" each place it appears).

• An executor and a beneficiary of the same estate.

 

Tests To Be Met

To qualify for the special depreciation allowance, the property must meet all of the following tests.

Acquisition date test. Generally, you must have acquired the property either:

 

• After September 10, 2001, and before September 11, 2004, but only if no written binding contract for the acquisition was in effect before September 11, 2001, or

• Pursuant to a written binding contract entered into after September 10, 2001, and before September 11, 2004. Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001, and before September 11, 2004.

 

Placed in service date test.

Generally, the property must be placed in service for use in your trade or business or for the production of income after September 10, 2001, and before January 1, 2005.

If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback.

Original use test. The original use of the property must have begun with you after September 10, 2001. "Original use" means the first use to which the property is put, whether or not by you. Additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test.

Excepted Property

The following property does not qualify for the special depreciation allowance.

 

• Property used by any person before September 11, 2001.

• Property required to be depreciated using ADS. This includes listed property used 50% or less in a qualified business use.

• Qualified New York Liberty Zone leasehold improvement property (defined next).

 

Qualified New York Liberty Zone leasehold improvement property.

This is any qualified leasehold improvement property (as defined earlier) if all of the following requirements are met.

 

• The improvement is to a building located in the New York Liberty Zone (defined later under

New York Liberty Zone Benefits

).

• The improvement is placed in service after September 10, 2001, and before January 1, 2007.

• No written binding contract for the improvement was in effect before September 11, 2001.

 

Election Not To Claim the Allowance

You can elect not to claim the special depreciation allowance for qualified property. If you make this election for any property, it applies to all property in the same property class placed in service during the year. To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election.

When to make election. Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service.

However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Attach the election statement to the amended return. At the top of the election statement, write "Filed pursuant to section 301.9100-2."

Revoking an election. Once you elect not to deduct the special depreciation allowance for a class of property, you cannot revoke the election without IRS consent. A request to revoke the election is subject to a user fee.

Rules for Returns Filed Before June 1, 2002

The following rules apply if you placed qualified property in service after September 10, 2001, and filed your return before June 1, 2002. The rules apply to returns for the following years.

 

• 2000 fiscal years that end after September 10, 2001.

• 2001 calendar and fiscal years.

 

Claiming the allowance.

If you did not claim the allowance on your return and did not make the election not to claim the allowance, you can do either of the following to claim the allowance.

 

• File an amended return by the due date (not including extensions) of your return for the year following the year the property was placed in service. Write "Filed Pursuant to

Rev. Proc. 2002-33

" at the top of the amended return.

• File Form 3115, Application for Change in Accounting Method , with your return for the year following the year the property was placed in service. Your return must be filed by the due date (including extensions). Write "Automatic Change Filed Under Rev. Proc. 2002-33" on the appropriate line of Form 3115. You must also file a copy (with signature) of the completed Form 3115 with the IRS National Office no later than when you file the original with your return. For more information about filing Form 3115, including the address to send it to, see Revenue Procedure 2002-9, Revenue Procedure 2002-19, and Revenue Procedure 2002-33.

 

Example 1.

You are an individual and you use the calendar year. You placed qualified property in service for your business in December 2001. You filed your 2001 income tax return before April 15, 2002. You did not claim the special depreciation allowance for the property and did not make the election not to claim the allowance. You can claim the special allowance by filing an amended 2001 return by April 15, 2003, with "Filed Pursuant to

Rev. Proc. 2002-33

" at the top of the amended return. You must file an amended return by April 15, 2003, even if you get an extension of time to file your 2002 tax return.

Example 2. The facts concerning your 2001 return are the same as in Example 1 . In addition, you got an automatic 4-month extension of time (to August 15, 2003) to file your 2002 return. You can claim the special allowance by filing a Form 3115 (with "Filed Pursuant to Rev. Proc. 2002-33" on the appropriate line) with your 2002 return by August 15, 2003. You must also file a copy of this Form 3115 with the IRS National Office no later than when you file your 2002 return.

Electing not to claim the allowance. Generally, you have elected not to claim the special depreciation allowance for a class of property if you:

 

• Filed your return timely (including extensions) for the year you placed qualified property in service and indicated on a statement with the return that you are not claiming the allowance, or

• Filed your return timely and filed an amended return within 6 months of the due date of the original return (not including extensions) and indicated on a statement with the amended return that you are not claiming the allowance. The statement must indicate that you are not deducting the special depreciation allowance and the class of property to which the election applies. The statement can be either attached to or written on the return. You can, for example, write "not deducting 30%" on Form 4562.

 

Deemed election.

If you have not followed either of the procedures described above to elect

not

to claim the allowance, you may still be treated as making the election. You will be treated as making the election if you meet both of the following conditions.

 

• You filed your return for the year you placed the property in service and claimed depreciation, but not the special allowance, for any class of property.

• You do not file an amended return or a Form 3115 within the time prescribed for claiming the special allowance. See Claiming the allowance , earlier.

 

Passenger Automobiles

The limit on your depreciation deduction (including any section 179 deduction) for any passenger automobile that is qualified property (defined earlier) placed in service after September 10, 2001, and for which you claim the special depreciation allowance is increased. Generally, the limit is increased from $3,060 to $7,660. However, if the automobile is a qualified electric car, the limit is increased from $9,280 to $23,080 ($22,980 if placed in service in 2002). Table 1 shows the maximum deduction amounts for 2001.

 Table 1. Maximum Deduction for 2001

 

 

 

                          Placed in Service    Placed in Service

 

  Qualified Vehicle

       

Before Sept. 11

     

After Sept. 10

 

  Passenger automobile     $3,060               $ 7,660

 

  Electric car              9,280                23,080

/1/

 

 

 

/1/

 $22,980 if you place an electric car in service in 2002.

 

 

Election not to claim the allowance.

The increased maximum depreciation deduction does not apply if you elected

not

to claim the special depreciation allowance as explained earlier under

Election Not To Claim the Allowance

and

Rules for Returns Filed Before June 1, 2002

.

New York Liberty Zone Benefits

Several benefits are available for property you place in service in the New York Liberty Zone (Liberty Zone). They include a special depreciation allowance for the year you place the property in service, an increased section 179 deduction, and the classification of certain leasehold improvement property as 5-year property.

Area defined. The New York Liberty Zone is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway) in the Borough of Manhattan in the City of New York, New York.

Special Liberty Zone Depreciation Allowance

You can take a special depreciation allowance for qualified Liberty Zone property you place in service after September 10, 2001. The allowance is an additional deduction of 30% of the property's depreciable basis. To figure the depreciable basis, you must first multiply the property's cost or other basis by the percentage of business/investment use and then reduce that amount by any section 179 deduction and certain other deductions and credits for the property. See What Is the Basis for Depreciation? on page 23 in Publication 946 for more information on figuring depreciable basis.

The allowance is deductible for both regular tax and alternative minimum tax (AMT) purposes. There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. In the year you claim the allowance (generally the year you place the property in service), you must reduce the depreciable basis of the property by the allowance before figuring your regular depreciation deduction.

Caution. You cannot claim the special Liberty Zone depreciation allowance for property eligible for the special depreciation allowance explained earlier in Qualified Property under Special Depreciation Allowance. Qualified property is eligible for only one special depreciation allowance.

Example 1. On November 1, 2001, you bought and placed in service in your business, which is in the Liberty Zone, qualified Liberty Zone property that cost $200,000. You did not elect to claim a section 179 deduction. You can deduct 30% of the cost ($60,000) as a special Liberty Zone depreciation allowance for 2001. You use the remaining $140,000 of cost to figure your regular depreciation deduction for 2001 and later years.

Example 2. The facts are the same as in Example 1 , except that you choose to deduct $59,000 of the property's cost as a section 179 deduction. (See Increased Section 179 Deduction , later, for information concerning how this section 179 deduction amount is figured). You use the remaining $141,000 of cost to figure your special Liberty Zone depreciation allowance of $42,300 ($141,000 X 30%). You use the remaining $98,700 of cost to figure your regular depreciation deduction for 2001 and later years.

Qualified Liberty Zone Property

For a 2001 calendar or fiscal year and a 2000 fiscal year that ends after September 10, 2001, property qualifies for the special Liberty Zone depreciation allowance if it meets the following requirements.

 

1) It is one of the following types of property.

 

a) Used property depreciated under MACRS with a recovery period of 20 years or less. See

Can You Use MACRS To Depreciate Your Property

and

Which Recovery Period Applies?

on pages 7 and 23, respectively, in

Publication 946

.

b) Used water utility property. See 25-year property on page 22 in Publication 946.

c) Used computer software that is not a section 197 intangible as described in Computer software on page 5 in Publication 946. (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS.)

d) Certain nonresidential real property and residential rental property (defined later).

 

2) It meets the following tests (explained later under

Tests to be met

).

 

a) Acquisition date test.

b) Placed in service date test.

c) Substantial use test.

d) Original use test.

 

3) It is

not

excepted property (explained later under

Excepted property

).

 

Nonresidential real property and residential rental property.

This property is qualifying property only to the extent it rehabilitates real property damaged, or replaces real property destroyed or condemned, as a result of the terrorist attack of September 11, 2001. Property is treated as replacing destroyed or condemned property if, as part of an integrated plan, such property replaces real property included in a continuous area that includes real property destroyed or condemned.

For these purposes, real property is considered destroyed (or condemned) only if an entire building or structure was destroyed (or condemned) as a result of the terrorist attack. Otherwise, the property is considered damaged real property. For example, if certain structural components of a building (such as walls, floors, or plumbing fixtures) are damaged or destroyed as a result of the terrorist attack, but the building is not destroyed (or condemned), then only costs related to replacing the damaged or destroyed structural components qualify for the special Liberty Zone depreciation allowance.

Tests to be met. To qualify for the special Liberty Zone depreciation allowance, your property must meet all of the following tests.

Acquisition date test. You must have acquired the property by purchase after September 10, 2001, and there must not have been a binding written contract for the acquisition in effect before September 11, 2001.

For information on the acquisition of property by purchase, see Property Acquired by Purchase on page 15 of Publication 946.

Property you manufacture, construct, or produce for your own use meets this test if you began the manufacture, construction, or production of the property after September 10, 2001.

Placed in service date test. Generally, the property must be placed in service for use in your trade or business or for the production of income before January 1, 2007 (January 1, 2010, in the case of qualifying nonresidential real property and residential rental property).

If you sold property you placed in service after September 10, 2001, and you leased it back within 3 months after the property was originally placed in service, the property is treated as placed in service no earlier than the date it is used under the leaseback.

Substantial use test. Substantially all use of the property must be in the Liberty Zone and in the active conduct of your trade or business in the Liberty Zone.

Original use test. The original use of the property in the Liberty Zone must have begun with you after September 10, 2001.

Used property can be qualified Liberty Zone property if it has not previously been used within the Liberty Zone. Also, additional capital expenditures you incurred after September 10, 2001, to recondition or rebuild your property meet the original use test if the original use of the property in the Liberty Zone began with you.

Excepted property. The following property does not qualify for the special Liberty Zone depreciation allowance.

 

• Property eligible for the special depreciation allowance explained earlier in

Qualified Property

under

Special Depreciation Allowance

.

• Property required to be depreciated using ADS. This includes listed property used 50% or less in a qualified business use.

• Qualified New York Liberty Zone leasehold improvement property (defined earlier in Excepted Property under Special Depreciation Allowance ).

 

Example.

In December 2001, you bought and placed in service in your business in the Liberty Zone the following property.

 

• New office furniture with a MACRS recovery period of 7 years.

• A used computer with a MACRS recovery period of 5 years. The computer had not previously been used within the Liberty Zone.

 

Because the office furniture is new property, it qualifies for the special depreciation allowance, but not the special Liberty Zone depreciation allowance. Because the computer is used property that had not previously been used in the Liberty Zone, it qualifies for the special Liberty Zone depreciation allowance, but not the special depreciation allowance.

Election Not To Claim the Liberty Zone Allowance

You can elect not to claim the special Liberty Zone depreciation allowance for qualified property. If you make this election for any property, it applies to all property in the same property class placed in service during the year. To make this election, attach a statement to your return indicating you elect not to claim the allowance and the class of property for which you are making the election.

When to make the election. Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service.

However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Attach the election statement to the amended return. At the top of the election statement, write "Filed pursuant to section 301.9100-2."

Revoking an election. Once you elect not to deduct the special Liberty Zone depreciation allowance for a class of property, you cannot revoke the election without IRS consent. A request to revoke the election is subject to a user fee.

Returns filed before June 1, 2002. The rules that apply to the special depreciation allowance discussed earlier in Rules for Returns Filed Before June 1, 2002 under Special Depreciation Allowance also apply to the special Liberty Zone depreciation allowance.

Increased Section 179 Deduction

Under section 179 of the Internal Revenue Code, you can choose to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. For tax years beginning in 2000, that limit was $20,000. For tax years beginning in 2001 and 2002, that limit is generally $24,000. If the cost of qualifying section 179 property placed in service in a year is over $200,000, you must reduce the dollar limit (but not below zero) by the amount of the cost over $200,000.

Increased Dollar Limit

The dollar limit on the section 179 deduction is increased for certain property placed in service in the Liberty Zone. The increase is the smaller of the following amounts.

 

• $35,000.

• The cost of section 179 property that is qualified Liberty Zone property placed in service during the year.

 

Caution. If you use the revised 2001 Form 4562 (dated March 2002) for a tax year beginning in 2000, you must reduce the section 179 dollar limit to $20,000 before adding the additional amount for qualified property.

Qualified property. To qualify for the increased section 179 deduction, your property must be section 179 property that is either:

 

• Qualified Liberty Zone property, or

• Property that would be qualified Liberty Zone property except that it is eligible for the special depreciation allowance. Qualified Liberty Zone property is explained earlier in Qualified Liberty Zone Property under Special Liberty Zone Depreciation Allowance . Property eligible for the special depreciation allowance is explained earlier in Qualified Property under Special Depreciation Allowance . For information on the requirements that must be met for property to qualify for the section 179 deduction, see What Property Qualifies? on page 14 of Publication 946.

 

Example 1.

In 2002, you place in service in your business, which is in the Liberty Zone, qualified property (defined earlier) costing $25,000. Because this cost is less than $35,000, the dollar limit on the section 179 deduction is increased by $25,000 to $49,000 ($24,000 + $25,000).

Example 2. In 2002, you place in service in your business, which is in the Liberty Zone, qualified property (defined earlier) costing $75,000. Because $35,000 is less than the cost of the property you place in service, the dollar limit on the section 179 deduction you can claim is increased by $35,000 to $59,000 ($24,000 + $35,000).

Reduced Dollar Limit

Generally, you must reduce the dollar limit for a year by the cost of qualifying section 179 property placed in service in the year that is more than $200,000. However, if the cost of your Liberty Zone property exceeds $200,000, you take into account only 50% (instead of 100%) of the cost of qualified property placed in service in a year.

Example. In 2002, you place in service in your business, which is in the Liberty Zone, qualified property costing $460,000. Your increased dollar limit is $59,000 ($35,000 + $24,000). Because 50% of the cost of the property you place in service ($230,000) is $30,000 more than $200,000, you must reduce your $59,000 dollar limit to $29,000 ($59,000 - $30,000).

Recapture Rules

Rules similar to those explained on page 20 of Publication 946 under When Must You Recapture the Deduction? apply with respect to any qualified property you stop using in the Liberty Zone.

Returns Filed Before June 1, 2002

If you filed a return before June 1, 2002, and did not deduct the increased section 179 amount for qualified property placed in service after September 10, 2001, you can deduct the increased amount by filing an amended return by the due date (not including extensions) of the return for the year after the year the property was placed in service. This rule applies to returns for the following years.

 

• 2000 fiscal years that end after September 10, 2001.

• 2001 calendar and fiscal years. On the amended return, write "Filed Pursuant to Rev. Proc. 2002-33."

 

Liberty Zone Leasehold Improvement Property

Qualified Liberty Zone leasehold improvement property (described earlier in Qualified Property under Special Depreciation Allowance ) is 5-year property. This means that it is depreciated over a recovery period of 5 years. For information about recovery periods, see Which Recovery Period Applies? on page 23 of Publication 946.

The straight-line method must be used with respect to qualified Liberty Zone leasehold improvement property.

Under ADS, the recovery period for qualified Liberty Zone leasehold improvement property is 9 years.

Returns Filed Before June 1, 2002

If you filed either of the following returns before June 1, 2002, and did not depreciate qualified Liberty Zone leasehold improvement property placed in service during the tax year as 5-year property using the straight line method, you should file an amended return before you file your return for the year after the year the property was placed in service.

 

• Your 2000 fiscal year return (for a 2000 fiscal year that ends after September 10, 2001).

• Your 2001 calendar or fiscal year return. On the amended return, write "Filed Pursuant to Rev. Proc. 2002-33."

 

 

Table 2. Rules for Returns Filed Before June 1, 2002Note:

 This chart highlights the rules for returns affected by the

 

 Job Creation and Worker Assistance Act of 2002 that were filed

 

 before June 1, 2002, without accounting for any of the new

 

 benefits under the law. See the text for definitions and

 

 examples.

Do not rely on this chart alone.  

 

 

 

IF you want to...

       

THEN you...

             

BY...

 

 claim the special        • must file an           • the due date (not

 

 depreciation allowance   amended return           including extensions)

 

 or special Liberty Zone                           of your return for the

 

 depreciation allowance                            year after the year the

 

                                                   property was placed

 

                                                   in service,

or

 

                          • must file Form 3115,   • the due date (including

 

                         

Application for Change  

extensions) of your

 

                          in Accounting Method

,    return for the year

 

                          with your return for     after the year the

 

                          the year after the year  property was placed

 

                          the property was placed  in service,

and

 

                          in service

 

                          • must file a copy of    • the date you file the

 

                          your completed Form      original Form 3115

 

                          3115 with the IRS        with your return for

 

                          National Office          the year after the year

 

                                                   the property was placed

 

                                                   in service.

 

 

 elect not to claim the   • must have filed your

 

 special depreciation     return timely for

 

 allowance or the         the year the property

 

 special Liberty Zone     was placed in service,

 

 depreciation            

and

 

 allowance

/1/

            • must file an amended   • the date that is 6

 

                          return stating you are   months after the due

 

                          not claiming the         date of the original

 

                          allowance                return (not including

 

                                                   extensions).

 

 

 deduct the increased     • must file an amended   • the due date (not

 

 section 179 amount       return                   including extensions)

 

                                                   of your return for the

 

                                                   year after the year

 

                                                   the property was placed

 

                                                   in service.

 

 

 use a 5-year recovery    • should file an         • the date you file

 

 period for depreciating  amended return           your return for the

 

 qualified Liberty Zone                            year after the year

 

 leasehold improvement                             the property was placed

 

 property                                          in service.

 

 

 

/1/

 See also

Deemed election

  under

Rules for Returns Filed Before June 1, 2002

, earlier.

 

 

6. How To Get Tax Help

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

Contacting your Taxpayer Advocate. If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.

The Taxpayer Advocate represents your interests and concerns within the IRS by protecting your rights and resolving problems that have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.

To contact your Taxpayer Advocate:

 

• Call the Taxpayer Advocate at

1-877-777-4778.

• Call the IRS at 1-800-829-1040.

• Call, write, or fax the Taxpayer Advocate office in your area.

• Call 1-800-829-4059 if you are a TTY/TDD user. For more information, see Publication 1546, The Taxpayer Advocate Service of the IRS.

 

Free tax services.

To find out what services are available, get

Publication 910

,

Guide to Free Tax Services.

It contains a list of free tax publications and an index of tax topics. It also describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics.

Personal computer. With your personal computer and modem, you can access the IRS on the Internet at http://www.irs.gov . While visiting our web site, you can:

 

• Find answers to questions you may have.

• Download forms and publications or search for forms and publications by topic or keyword.

• View forms that may be filled in electronically, print the completed form, and then save the form for recordkeeping.

• View Internal Revenue Bulletins published in the last few years.

• Search regulations and the Internal Revenue Code.

• Receive our electronic newsletters on hot tax issues and news.

• Get information on starting and operating a small business. You can also reach us with your computer using File Transfer Protocol at ftp.irs.gov.

 

TaxFax Service.

Using the phone attached to your fax machine, you can receive forms and instructions by calling

703-368-9694.

Follow the directions from the prompts. When you order forms, enter the catalog number for the form you need. The items you request will be faxed to you.

For help with transmission problems, call the FedWorld Help Desk at 703-487-4608.

Phone. Many services are available by phone.

 

Ordering forms, instructions, and publications.

Call

1-800-829-3676

to order current and prior year forms, instructions, and publications.

Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.

TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications.

TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics. Evaluating the quality of our telephone services. To ensure that IRS representatives give accurate, courteous, and professional answers, we evaluate the quality of our telephone services in several ways.

• A second IRS representative sometimes monitors live telephone calls. That person only evaluates the IRS assistor and does not keep a record of any taxpayer's name or tax identification number.

• We sometimes record telephone calls to evaluate IRS assistors objectively. We hold these recordings no longer than one week and use them only to measure the quality of assistance.

• We value our customers' opinions. Throughout this year, we will be surveying our customers for their opinions on our service.

 

Walk-in.

You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, libraries, grocery stores, copy centers, city and county governments, credit unions, and office supply stores have an extensive collection of products available to print from a CD-ROM or photocopy from reproducible proofs. Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.

Mail. You can send your order for forms, instructions, and publications to the Distribution Center nearest to you and receive a response within 10 workdays after your request is received. Find the address that applies to your part of the country.

 •   Western part of U.S.:

 

  Western Area Distribution Center

 

 Rancho Cordova, CA 95743-0001

 

 

 •  

Central part of U.S.:

 

 Central Area Distribution Center

 

 P.O. Box 8903

 

 Bloomington, IL 61702-8903

 

 

 •  

Eastern part of U.S. and foreign addresses:

 

 Eastern Area Distribution Center

 

 P.O. Box 85074

 

 Richmond, VA 23261-5074

 

 

CD-ROM.

You can order IRS Publication 1796,

Federal Tax Products on CD-ROM,

and obtain:

 

• Current tax forms, instructions, and publications.

• Prior-year tax forms and instructions.

• Popular tax forms that may be filled in electronically, printed out for submission, and saved for recordkeeping.

• Internal Revenue Bulletins.

 

The CD-ROM can be purchased from National Technical Information Service (NTIS) by calling

1-877-233-6767

or on the Internet at

http://www.irs.gov.

The first release is available in mid-December and the final release is available in late January.

IRS Publication 3207, Small Business Resource Guide, is an interactive CD-ROM that contains information important to small businesses. It is available in mid-February. You can get a free copy by calling 1-800-829-3676 or visiting the IRS web site at http://www.irs.gov.

This pamphlet is a joint project of the U.S. Department of Labor's Employee Benefits Security Administration (EBSA) and the Internal Revenue Service. Its publication does not constitute legal, accounting, or other professional advice. It does, however, constitute a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996.

This pamphlet and other EBSA publications are available by calling toll-free: 1-866-444-EBSA (3272)

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(Please indicate publication number 3998 or catalog number 34066S when ordering.)

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TDD* phone 1-800-326-2577

Starting a small business retirement savings plan can be easier than most business people think. What’s more, there are a number of retirement programs that provide tax advantages to both employers and employees.

Why Save?

Experts estimate that Americans will need 70 to 90 percent of their preretirement income to maintain their current standard of living when they stop working. So now is the time to look into retirement plan programs. As an employer, you have an important role to play in helping America’s workers save.

By starting a retirement savings plan, you will help your employees save for the future. Retirement plans may also help you attract and retain qualified employees, and they offer tax savings to your business. You will help secure your own retirement as well. You can establish a plan even if you are self-employed.

Any Tax Advantages?

A retirement plan has significant tax advantages:

 

• Employer contributions are deductible from the employer’s income,

• Employee contributions are not taxed until distributed to the employee, and

• Money in the program grows tax-free.

 

Any Other Incentives?

In addition to helping your business, your employees and yourself, recent tax law changes have made it easier than ever to establish a retirement plan. They include:

 

• Higher contribution limits so your employees (and you) can set aside even larger amounts for retirement;

• “Catch-up” rules that allow employees aged 50 and over to set aside additional contributions. The amount varies, depending on the type of plan;

• Tax credit for small employers that would enable them to claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE, or certain other types of plans (more on these later). The credit equals 50 percent of the cost to set up and administer the plan, up to a maximum of $500 per year for each of the first 3 years of the plan; and

• Tax credit for certain low- and moderate-income individuals (including self-employed) who make contributions to their plans (“Saver’s tax credit”). The amount of the credit is based on the contributions participants make and their credit rate. The maximum contribution eligible for the credit is $2,000. The credit rate can be as low as 10 percent or as high as 50 percent, depending on the participant’s adjusted gross income.

• A Roth 401(k) program that can be added to a 401(k) plan to allow participants to make after-tax contributions into separate accounts, providing an additional way to save for retirement. Distributions upon death or disability or after age 59 1/2of amounts held for 5 years in Roth accounts, including earnings, are generally tax free.

 

A Few Retirement Facts

Most private-sector retirement vehicles are either Individual Retirement Arrangements (IRAs), defined contribution (DC) plans or defined benefit (DB) plans.

People tend to think of an IRA as something that individuals establish on their own, but an employer can help its employees set up and fund their IRAs. With an IRA, the amount that an individual receives at retirement depends on the funding of the IRA and the earnings (or income) on those funds.

Defined contribution plans are employer-established plans that do not promise a specific amount of benefit at retirement. Instead, employees or their employer (or both) contribute to employees’ individual accounts under the plan, sometimes at a set rate (such as 5 percent of salary annually). At retirement, an employee receives the accumulated contributions plus earnings (or minus losses) on such invested contributions.

Defined benefit plans, on the other hand, promise a specified benefit at retirement, for example, $1000 a month at retirement. The amount of the benefit is often based on a set percentage of pay multiplied by the number of years the employee worked for the employer offering the plan. Employer contributions must be sufficient to fund promised benefits.

Small businesses may choose to offer IRAs, DC plans, or DB plans. Many financial institutions and pension practitioners make available one or more of these retirement plans that have been pre-approved by the IRS.

On the following two pages you will find a chart outlining the advantages of each of the most popular types of IRA-based and defined contribution plans and an overview of a defined benefit plan.

 ----------------------------------------------------------------------

 

                           

IRA BASED PLANS

 

 

                         

Payroll                       SEP

 

                       Deduction IRA

 

 

               

Key

  Easy to set up and         Easy to set up and

 

         

Advantage

  maintain.                  maintain.

 

 

         

Employer

  Any employer with one      Any employer with one

 

       

Eligibility

  or more employees.         or more employees.

 

 

       

Employer's

  Arrange for employees      May use IRS

 

             

Role

  to make payroll deduction  Form 5305-SEP to set up

 

                    contributions.             the plan. No annual

 

                    Transmit contributions     filing requirement for

 

                    for employees to IRA.      employer.

 

                    No annual filing

 

                    requirement for

 

                    employer.

 

 

   

Contributors to

  Employee contributions     Employer contributions

 

         

the Plan

  remitted through           only.

 

                    payroll deduction.

 

 

           

Maximum

  $4,000 for 2007;           Up to 25% of

 

           

Annual

  $5,000 for 2008.           compensation

1

 but

 

     

Contribution

  Additional contributions   no more than

 

 

(per participant)

  can be made by             $45,000 for 2007.

 

                    participants age 50 or

 

               See  over up to $1,000 in

 

   

http://www.irs.gov/ep

  2007.

 

        for annual

 

           updates

 

 

     

Contributor's

  Employee can decide        Employer can decide

 

           

Options

  how much to                whether to make

 

                    contribute at any time.    contributions

 

                                               year-to-year.

 

 

           

Minimum

  There is no requirement.   Must be offered to all

 

         

Employee

  Can be made                employees who are at

 

         

Coverage

  available to any           least 21 years of age,

 

     

Requirements

  employee.                  employed by the

 

                                               employer for 3 of the

 

                                               last 5 years and had

 

                                               compensation of $500

 

                                               (for 2007).

 

 

     

Withdrawals,

  Withdrawals permitted      Withdrawals permitted

 

         

Loans and

  anytime subject to         anytime subject to

 

         

Payments

  federal income taxes;      federal income taxes,

 

                    early withdrawals          early withdrawals

 

                    subject to an additional   subject to an

 

                    tax (special rules         additional tax.

 

                    apply to Roth IRAs).

 

 

           

Vesting

  Contributions are          Contributions are

 

                    immediately 100%           immediately 100% vested.

 

                    vested.

 

 

 

[Table Continued]

 

 

                       

SIMPLE IRA Plan            Safe Harbor 401(k)

 

 

               

Key

  Salary reduction plan      Permits high level of

 

         

Advantage

  with little                salary deferrals by

 

                    administrative paperwork.  employees without annual

 

                                               discrimination testing.

 

 

         

Employer

  Any employer with 100 or   Any employer with one

 

       

Eligibility

  fewer employees that does  or more employees.

 

                    not currently maintain

 

                    another retirement plan.

 

 

       

Employer's

  May use IRS Forms          No model form to

 

             

Role

  5304-SIMPLE or             establish this plan.

 

                    5305-SIMPLE to set up the  Advice from a financial

 

                    plan. No annual filing     institution or employee

 

                    requirement for employer.  benefit advisor may be

 

                    Bank or financial          necessary. A minimum

 

                    institution handles most   amount of employer

 

                    of the paperwork.          contributions is

 

                                               required. Annual filing

 

                                               of Form 5500 is

 

                                               required.

 

 

   

Contributors to

  Employee salary reduction  Employee salary

 

         

the Plan

  contributions and          reduction contributions

 

                    employer contributions.    and employer

 

                                               contributions.

 

 

           

Maximum

 

Employee:

 $10,500 in      

Employee:

 $15,500 in

 

           

Annual

  2007. Additional           2007. Additional

 

     

Contribution

  contributions can be       contributions can be

 

 

(per participant)

  made by participants age   made by participants age

 

                    50 or over up to $2,500    50 or over up to $5,000

 

               See  in 2007.                   in 2007.

 

   

http://www.irs.gov/ep

 

        for annual  

Employer:

 Either match    

Employer/Employee

 

           updates  employee contributions    

Combined:

 Up to the

 

                    100% of first 3% of        lesser of 100% of

 

                    compensation (can be       compensation

1

 or $45,000

 

                    reduced to as low as 1%    for 2007. Employer can

 

                    in any 2 out of 5 yrs.);   deduct amounts that do

 

                    or contribute 2% of        not exceed 25% of

 

                    each eligible              aggregate compensation

 

                    employee's                 for all participants.

 

                    compensation.

2

 

 

     

Contributor's

  Employee can decide how    Employee can decide how

 

           

Options

  much to contribute.        much to contribute

 

                    Employer must make         pursuant to a salary

 

                    matching contributions     reduction agreement. The

 

                    or contribute 2% of each   employer must make

 

                    employee's compensation.   either specified

 

                                               matching contributions

 

                                               or a 3% contribution

 

                                               to all participants.

 

 

           

Minimum

  Must be offered to all     Generally, must be

 

         

Employee

  employees who have earned  offered to all

 

         

Coverage

  income of at least $5,000  employees at least 21

 

     

Requirements

  in any prior 2 years, and  years of age who worked

 

                    are reasonably expected    at least 1,000 hours in

 

                    to earn at least $5,000    a previous year.

 

                    in the current year.

 

 

     

Withdrawals,

  Withdrawals permitted      Withdrawals permitted

 

         

Loans and

  anytime subject to         after a specified event

 

         

Payments

  federal income taxes,      occurs (e.g.,

 

                    early withdrawals          retirement, plan

 

                    subject to an              termination, etc.)

 

                    additional tax.            subject to federal

 

                                               income taxes. Plan may

 

                                               permit loans and

 

                                               hardship withdrawals;

 

                                               early withdrawals

 

                                               subject to an

 

                                               additional tax.

 

 

           

Vesting

  Employee salary reduction  Employee salary

 

                    contributions and          reduction contributions

 

                    employer contributions     and most employer

 

                    are immediately 100%       contributions are

 

                    vested.                    immediately 100% vested.

 

                                               Some employer

 

                                               contributions may vest

 

                                               over time according to

 

                                               plan terms.

 

 

                       

DEFINED CONTRIBUTION PLANS

 

 

                     

Automatic Enrollment           401(k)

 

                      Safe Harbor 401(k)

3

 

 

               

Key

  Permits high level of      Permits high level of

 

         

Advantage

  salary deferrals by        salary deferrals by

 

                    employees without annual   employees.

 

                    discrimination testing

 

                    (after 2007).

 

 

         

Employer

  Any employer with one or   Any employer with one or

 

       

Eligibility

  more employees.            more employees.

 

 

       

Employer's

  No model form to           No model form to

 

             

Role

  establish this plan.       establish this plan.

 

                    Advice from a financial    Advice from a financial

 

                    institution or employee    institution or employee

 

                    benefit advisor may be     benefit advisor may be

 

                    necessary. A minimum       necessary. Annual filing

 

                    amount of employer         of Form 5500 is

 

                    contributions is           required. Requires

 

                    required. Annual filing    annual

 

                    of Form 5500 is            non-discrimination

 

                    required.                  testing to ensure plan

 

                                               does not discriminate in

 

                                               favor of highly

 

                                               compensated employees.

 

 

   

Contributors to

  Employee salary            Employee salary

 

         

the Plan

  reduction contributions    reduction contributions

 

                    and employer               and maybe employer

 

                    contributions.             contributions.

 

 

           

Maximum  

Employee

:

 See annual      

Employee

:

 $15,500 in

 

           

Annual

  update for 2008 dollar     2007. Additional

 

     

Contribution

  limit. Additional          contributions can be

 

 

(per participant)

  contributions can be       made by participants age

 

                    made by participants age   50 or over up to $5,000

 

               See  50 or over.                in 2007.

 

   

http://www.irs.gov/ep

 

        for annual  

Employer/Employee          Employer/Employee

 

           updates  

Combined

:

 Up to the        

Combined

:

 Up to the

 

                    lesser of 100% of          lesser of 100% of

 

                    compensation or the        compensation

1

 or

 

                    dollar limit for 2008      $45,000 for 2007.

 

                    (see annual update).       Employer can deduct

 

                    Employer can deduct        amounts that do not

 

                    amounts that do not        exceed 25% of aggregate

 

                    exceed 25% of aggregate    compensation for all

 

                    compensation for all       participants.

 

                    participants.

 

 

     

Contributor's

  Employees, unless they     Employee can decide how

 

           

Options

  opt otherwise, 3%          much to contribute

 

                    salary reduction           pursuant to a salary

 

                    contributions, with        reduction agreement. The

 

                    automatic annual           employer can make

 

                    increases for 3 years.     additional

 

                    The employer must make     contributions, including

 

                    either specified           matching contributions

 

                    matching contributions     as set by plan terms.

 

                    or a 3% contribution to

 

                    all participants.

 

 

           

Minimum

  Generally, must include    Generally, must be

 

         

Employee

  all employees who have     offered to all employees

 

         

Coverage

  not already opted out      at least 21 years of age

 

     

Requirements

  and who are at least 21    who worked at least

 

                    years of age who worked    1,000 hours in a

 

                    at least 1,000 hours in    previous year.

 

                    a previous year.

 

 

     

Withdrawals,

  Withdrawals permitted      Withdrawals permitted

 

         

Loans and

  after a specified event    after a specified event

 

         

Payments

  occurs (e.g.,              occurs (e.g.,

 

                    retirement, plan           retirement, plan

 

                    termination, etc.)         termination, etc.)

 

                    subject to federal         subject to federal

 

                    income taxes. Plan may     income taxes. Plan may

 

                    permit loans and           permit loans and

 

                    hardship withdrawals;      hardship withdrawals;

 

                    early withdrawals          early withdrawals

 

                    subject to an additional   subject to an additional

 

                    tax.                       tax.

 

 

           

Vesting

  Employee salary            Employee salary

 

                    reduction contributions    reduction contributions

 

                    vest immediately and       are immediately 100%

 

                    most employer              vested. Employer

 

                    contributions must be      contributions may vest

 

                    100% vested after 2        over time according to

 

                    years of service. Some     plan terms.

 

                    employer contributions

 

                    may vest over longer

 

                    period according to plan

 

                    terms.

 

 

 

[Table Continued]

 

 

                                                 

Defined Benefit

 

                      Profit Sharing

 

 

               

Key

  Permits employer to        Provides a fixed,

 

         

Advantage

  make large contributions   pre-established benefit

 

                    for employees.             for employees.

 

 

         

Employer

  Any employer with one or   Any employer with one or

 

       

Eligibility

  more employees.            more employees.

 

 

       

Employer's

  No model form to           No model form to

 

             

Role

  establish this plan.       establish this plan.

 

                    Advice from a financial    Advice from a financial

 

                    institution or employee    institution or employee

 

                    benefit advisor may be     benefit advisor would be

 

                    necessary. Annual filing   necessary. Annual filing

 

                    of Form 5500 is            of Form 5500 is

 

                    required.                  required. An actuary

 

                                               must determine annual

 

                                               contributions.

 

 

   

Contributors to

  Annual employer            Primarily funded by

 

         

the Plan

  contribution is            employer.

 

                    discretionary.

 

 

           

Maximum

  Up to the lesser of 100%   Annually determined

 

           

Annual

  of compensation

1

 or        contribution.

 

     

Contribution

  $45,000 for 2007.

 

 

(per participant)

  Employer can deduct

 

                    amounts that do not

 

               See  exceed 25% of aggregate

 

   

http://www.irs.gov/ep

  compensation for all

 

        for annual  participants.

 

           updates

 

 

     

Contributor's

  Employer makes             Employer generally

 

           

Options

  contribution as set by     required to make

 

                    plan terms. Employee       contribution as set

 

                    contributions, if          by plan terms.

 

                    allowed, as set by plan

 

                    terms.

 

 

           

Minimum

  Generally, must be         Generally, must be

 

         

Employee

  offered to all employees   offered to all

 

         

Coverage

  at least 21 years of age   employees at least 21

 

     

Requirements

  who worked at least        years of age who worked

 

                    1,000 hours in a           at least 1,000 hours in

 

                    previous year.             a previous year.

 

 

     

Withdrawals,

  Withdrawals permitted      Payment of benefits

 

         

Loans and

  after a specified event    after a specified event

 

         

Payments

  occurs (e.g.,retirement,   occurs (e.g. retirement,

 

                    plan termination, etc.)    plan termination, etc.).

 

                    subject to federal         Plan may permit loans;

 

                    income taxes. Plan may     early withdrawals

 

                    permit loans and           subject to an additional

 

                    hardship withdrawals;      tax.

 

                    early withdrawals

 

                    subject to an additional

 

                    tax.

 

 

           

Vesting

  May vest over time         May vest over time

 

                    according to plan terms.   according to plan terms.

 

 ----------------------------------------------------------------------

 

 

1

 Maximum compensation on which 2007 contribution can be based is

 

 $225,000.

 

 

 

2

 Maximum compensation on which 2007 employer 2% non-elective

 

 contributions can be based is $225,000.

 

 

 

3

 After 2007

 

 ======================================================================

 

 

 

Payroll-Deduction IRAs

 

 

Even if an employer does not want to adopt a retirement plan, it can allow its employees to contribute to an IRA through payroll deductions, providing a simple and direct way for eligible employees to save. The decision about whether to contribute, and when and how much to contribute to the IRA (up to $4,000 for 2007, $5,000 in 2008, increasing thereafter) is always made by the employee in this type of arrangement.

Many individuals eligible to contribute to an IRA do not. One reason is that some individuals wait until the end of the year to set aside the money and then find that they do not have sufficient funds to do so. Payroll deductions allow individuals to plan ahead and save smaller amounts each pay period. Payroll deduction contributions are tax-deductible by an individual, to the same extent as other IRA contributions.

Simplified Employee Pensions (SEPs)

A SEP allows employers to set up a type of IRA for themselves and each of their employees. Employers must contribute a uniform percentage of pay for each employee, although they do not have to make contributions every year. For the year 2007, employer contributions are limited to the lesser of 25 percent of pay or $45,000. (Note: the dollar amount is indexed for inflation and will increase.) Most employers, including those who are self-employed, can establish a SEP.

SEPs have low start-up and operating costs and can be established using a two-page form. And you can decide how much to put into a SEP each year – offering you some flexibility when business conditions vary.

SIMPLE IRA Plan

This savings option is for employers with 100 or fewer employees and involves a type of IRA.

A SIMPLE IRA plan allows employees to contribute a percentage of their salary each paycheck and requires employer contributions. Under SIMPLE IRA plans, employees can set aside up to $10,500 in 2007 by payroll deduction. For years after 2007, annual cost-of-living updates can be found at http://www.irs.gov/ep. Employers must either match employee contributions dollar for dollar – up to 3 percent of an employee’s compensation – or make a fixed contribution of 2 percent of compensation for all eligible employees.

SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that SIMPLE IRAs (to hold contributions made under the SIMPLE IRA plan) are set up for each employee. A financial institution can do much of the paperwork. Additionally, administrative costs are low.

Employers may either have employees set up their own SIMPLE IRAs at a financial institution of their choice or have all SIMPLE IRAs maintained at one financial institution chosen by the employer.

Employees can decide how and where the money will be invested, and keep their SIMPLE IRAs even when they change jobs.

401(k) Plans

401(k) plans have become a widely accepted retirement savings vehicle for small businesses. Today, an estimated 44 million American workers participate in 401(k) plans that have total assets of about $2.5 trillion.

With a traditional 401(k) plan, employees can choose to defer a portion of their salary. So instead of receiving that amount in their paycheck today, the employee can contribute such amount into a 401(k) plan sponsored by their employer. These deferrals are accounted separately for each employee. Generally, the deferrals (plus earnings) are not taxed by the federal government or by most state governments until distributed.

401(k) plans can vary significantly in their complexity. However, many financial institutions and other organizations offer prototype 401(k) plans, which can greatly lessen the administrative burden on individual employers of establishing and maintaining such plans.

Safe Harbor 401(k) Plans

A safe harbor 401(k) plan is intended to encourage plan participation among rank and file employees and to ease administrative burden by eliminating the tests ordinarily applied under a traditional 401(k) plan. This plan is ideal for businesses with highly compensated employees whose contributions would be limited in a traditional 401(k) plan.

A safe harbor 401(k) plan allows employees to contribute a percentage of their salary each paycheck and requires employer contributions. In a safe harbor 401(k) plan, the mandatory employer contribution is always 100 percent vested.

Automatic Enrollment Safe Harbor 401(k) Plans

Beginning in 2008, automatic enrollment safe harbor 401(k) plans can increase plan participation among rank-and-file employees and ease administrative burden by eliminating the tests ordinarily required under a traditional 401(k) plan. This plan is for employers who want a high level of participation, and also have highly compensated employees whose contributions might be limited under a traditional plan.

All employees are automatically enrolled in the plan and contributions are deducted from their paychecks, unless they opt out after receiving notice from the plan. There are set employee contribution rates, which rise incrementally over the first few plan years, although different amounts can be chosen. Employer contributions are also required. In addition, there is a safe harbor for the default investment options provided under the plan that relieves the employer from liability for the investment results. Where contributions are invested following the safe harbor, state payroll withholding law is preempted, so plans may automatically deduct contributions from employees’ wages unless they opt out.

Profit-Sharing Plans

Employer contributions to a profit-sharing plan are discretionary. Depending on the plan terms, there is often no set amount that an employer needs to contribute each year.

To Find Out More…

The following jointly developed publications are available for small businesses on the DOL and IRS Web sites and through the toll-free numbers listed below:

 

401(k) Plans for Small Businesses (Publication 4222)

Payroll Deduction IRAs for Small Businesses (Publication 4587)

SIMPLE IRA Plans for Small Businesses (Publication 4334)

SEP Retirement Plans for Small Businesses (Publication 4333)

Retirement Plan Correction Programs (Publication 4224)

Retirement Plan Correction Programs CD-ROM (Publication 4050)

 

DOL Web site:

http://www.dol.gov/ebsa

Publications request number: 1-866-444-EBSA (3272)

If you do make contributions, you will need to have a set formula for determining how the contributions are allocated among plan participants. The funds are accounted separately for each employee.

As with 401(k) plans, profit-sharing plans can vary greatly in their complexity. Similarly, many financial institutions offer prototype profit-sharing plans that can reduce the administrative burden on individual employers.

Defined Benefit Plans

Some employers find that defined benefit (DB) plans offer business advantages. For instance, employees often value the fixed benefit provided by this type of plan. In addition, employees in DB plans can often receive a greater benefit at retirement than under any other type of retirement plan. On the employer side, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans. However, defined benefit plans are more com- plex and, thus, more costly to establish and maintain than other types of plans.

IRS Web site: http://www.irs.gov/ep

Tax form and publication ordering number: 1-800-TAX-FORM (1-800-829-3676)

(You can place your order 24 hours a day, 7 days a week.)

Also available from the U.S. Department of Labor:

 

• Meeting Your Fiduciary Responsibilities

• Understanding Retirement Plan Fees and Expenses

• Small Business Retirement Savings Advisor: http://www.dol.gov/elaws/pwbaplan.htm

 

Also available from the Internal Revenue Service:

 

Publication 560

,

Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)

Publication 590, Individual Retirement Arrangements (IRAs)

• Publication 4530, Designated Roth Accounts under a 401(k) or 403(b) Plan

DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Jurisdictions
  • Language
    English
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