Publication 3991
(May 2002)
Highlights of the Job Creation and Worker Assistance Act of 2002

In One Volume
Print pages 1-b23 
Braille pages i-iv and 1-96

Department of the Treasury
Internal Revenue Service
Print Catalog Number 33967C
Braille Catalog Number 34309A

Provided by:
MSMT Braille Center
A Division of Goodwill Industries
of the Redwood Empire
651 Yolanda Avenue
Santa Rosa, CA 95404

Table of Contents

Introduction 1
Chapter:
1. Tax Changes for Individuals 3
2. Tax Changes for Businesses 5
3. IRAs and Other Retirement Plans 8
4. Car Expenses 9
Supplement to Publication 463 9
Depreciation of Car 9
Amended Return 10
Election Not To Claim Special Allowance 10
Filled-in Form 2106 11
5. Depreciation 13
Supplement to Publication 946 13
Special Depreciation Allowance 13
New York Liberty Zone Benefits 16
6. How To Get Tax Help 20
Index 22

--------------------------------------------------------------------1

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.

--------------------------------------------------------------------2

Chapter 4 contains the supplement to Publication 463, 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:
Withholding: Get Form W-4, Employee's Withholding Allowance 
Certificate, and Publication 919, How Do I Adjust My Tax 
Withholding?

Estimated tax payments: Get Form 1040-ES, Estimated Tax for
Individuals, and Publication 505, Tax Withholding 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 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.

--------------------------------------------------------------------3

Chapter 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. Changes

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.

--------------------------------------------------------------------4

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.

--------------------------------------------------------------------5

Chapter 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 
--------------------------------------------------------------------6
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 
--------------------------------------------------------------------7
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.

--------------------------------------------------------------------8

Chapter 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 (SARSEP's). 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 
includable 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 includable 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).

--------------------------------------------------------------------9

Chapter 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, Travel, Entertainment, Gift, and Car Expenses, 
contains information on figuring depreciation on your car. However,
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.

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 Publication 463 was printed, the Job Creation and Worker 
Assistance Act of 2002 was signed into law by the President. 
Certain provisions of this new law may reduce your taxes for 2001. 
The new law contains the following provisions.

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 Publication 463 for information about MACRS.

You can claim the special depreciation allowance only for the year 
the qualified property is placed in service.

Qualified property. Qualified property includes a car (any 
four-wheeled vehicle, including a truck or van not more than 
6,000 pounds, that is made primarily for use on public streets,
roads, and highways) that meets all of the following requirements.

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 times 
.75). He then figures the special depreciation allowance of $4,500 
($15,000 times .30).

The remaining depreciable basis of $10,500 ($15,000 minus 
$4,500) is depreciated using MACRS (200% declining balance 
method, half-year convention) and results in a deduction of $2,100 
($10,500 times .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 times .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.
--------------------------------------------------------------------10

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 times .75 times .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.

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.

--------------------------------------------------------------------11

Election Pursuant to Notice 2001-70

2001 Form 2106
Employee Business Expenses
(Rev. March 2002)

See separate instructions.

Attach to Form 1040.

For Paperwork Reduction Act Notice, see instructions. 


Your name: Bob Smith.
Occupation in which you incurred expenses: Sales.
Social security number: 555-00-0000.

Part I. Employee Business Expenses and Reimbursements

Step 1. Enter Your Expenses

Description of print: Responses for lines 1-9 are recorded in 2 
columns with the headings: "Column A--Other Than Meals and 
Entertainment" and "Column B--Meals and Entertainment".

1. Vehicle expense from line 22 or line 29. (Rural mail carriers: 
See instructions.): A. 6,233; B. shaded.

2. Parking fees, tolls, and transportation, including train, bus, etc., 
that did not involve overnight travel or commuting to and from 
work: A. 150; B. shaded.

3. Travel expense while away from home overnight, including 
lodging, airplane, car rental, etc. Do not include meals and 
entertainment: A. ____; B. shaded.

4. Business expenses not included on lines 1 through 3. Do not 
include meals and entertainment: A. ____; B. shaded.

5. Meals and entertainment expenses (see instructions): A. shaded;
B. ____. 

6. Total expenses. In Column A, add lines 1 through 4 and enter 
the result. In Column B, enter the amount from line 5: A. 6,383; B.
____. 



Note: If you were not reimbursed for any expenses in Step 1, skip 
line 7 and enter the amount from line 6 on line 8.

Step 2. Enter Reimbursements Received From Your Employer for 
Expenses Listed in Step 1

7. Enter reimbursements received from your employer that were 
not reported to you in box I of Form W-2. include any 
reimbursements reported under code "L" in box 12 of your Form 
W-2 (see instructions): A. 450; B. ____. 

Step 3. Figure Expenses To Deduct on Schedule A (Form 1040)

8. Subtract line 7 from line 6. If zero or less, enter 0. However, 
if line 7 is greater than line 6 in Column A, report the excess as 
income on Form 1040, line 7: A. 5,933; B. ____. 
Note: If both columns of line 8 are zero, you cannot deduct 
employee business expenses. Stop here and attach Form 2106 to 
your return.

9. In Column A, enter the amount from line 8. In Column B, 
multiply line 8 by 50% (.50). (Employees subject to Department 
of Transportation (DOT) hours of service limits: Multiply meal 
expenses by 60% (.60) instead of 50%. For details, see 
instructions.): A. 5,933; B. ____. 

10. Add the amounts on line 9 of both columns and enter the 
total here. Also, enter the total on Schedule A (Form 1040), line 
20. (Fee-basis state or local government officials, qualified 
performing artists, and individuals with disabilities: See the 
instructions for special rules on where to enter the total.): 5,933.

--------------------------------------------------------------------12

Form 2106 Page 2

Part II. Vehicle Expenses

Section A. General Information (You must complete this section if 
you are claiming vehicle expenses.)

11. Enter the date the vehicle was placed in service: (a) Vehicle
1: 10-15; 2001; (b) Vehicle 2: ____. 

12. Total miles the vehicle was driven during 2001: 4,200 miles;
____ miles.

13. Business miles included on line 12: (a) Vehicle 1: 3,150 miles; 
(b) Vehicle 2: ____ miles. 

14. Percent of business use. Divide line 13 by line 12: (a) Vehicle
1: 75%; (b) Vehicle 2: ____ percent. 

15. Average daily roundtrip commuting distance: (a) Vehicle 1:
10 miles; (b) Vehicle 2: ____ miles.

16. Commuting miles included on line 12: (a) Vehicle 1: 500 miles; 
(b) Vehicle 2: ____ miles.

17. Other miles. Add lines 13 and 16 and subtract the total from 
line 12: (a) Vehicle 1: 500 miles; (b) Vehicle 2: ____ miles.

18. Do you (or your spouse) have another vehicle available for 
personal use?: ____ Yes; ____ No. [Yes is checked]

19. Was your vehicle available for personal use during off-duty 
hours?: ____ Yes; ____ No. [Yes is checked]

20. Do you have evidence to support your deduction?: ____ Yes; 
____ No. [Yes is checked]

21. If "Yes," is the evidence written: ____ Yes; ____ No. 
[Yes is checked]

Section B. Standard Mileage Rate (See the instructions for Part 11 
to find out whether to complete this section or Section C.)

22. Multiply line 13 by 34-1/2 cents (.345): ____. 

Section C. Actual Expenses

23. Gasoline, oil, repairs, vehicle insurance, etc.: (a) Vehicle
1: 650; (b) Vehicle 2: ____. 

24a. Vehicle rentals: (a) Vehicle 1: ____; (b) Vehicle 2: ____. 

24b. Inclusion amount (see instructions): (a) Vehicle
1: ____; (b) Vehicle 2: ____. 

24c. Subtract line 24b from line 24a: (a) Vehicle
1: ____; (b) Vehicle 2: ____. 

25. Value of employer-provided vehicle (applies only if 100% of 
annual lease value was included on Form W-2-see instructions): (a) 
Vehicle 1: ____; (b) Vehicle 2: ____. 

26. Add lines 23, 24c, and 25: (a) Vehicle 1: 650; (b) Vehicle 
2: ____. 

27. Multiply line 26 by the percentage on line 14: (a) Vehicle 
1: 488; (b) Vehicle 2: ____. 

28. Depreciation. Enter amount from line 38 below: (a) Vehicle 
1: 5,745; (b) Vehicle 2: ____. 

29. Add lines 27 and 28. Enter total here and on line 1: (a) 
Vehicle 1: 6,233; (b) Vehicle 2: ____. 

Section D. Depreciation of Vehicles (Use this section only if you 
owned the vehicle and are completing Section C for the vehicle.)

30. Enter cost or other basis (see instructions): (a) Vehicle 
1: 20,000; (b) Vehicle 2: ____. 

31. Enter section 179 deduction and special allowance (see 
instructions): (a) Vehicle 1: 4,500; (b) Vehicle 2: ____. 

32. Multiply line 30 by line 14 (see instructions if you claimed the 
section 179 deduction or special allowance): (a) Vehicle 1: 10,500;
(b) Vehicle 2: ____. 

33. Enter depreciation method and percentage (see instructions): 
(a) Vehicle 1: 200 DB 20%; (b) Vehicle 2: ____. 

34. Multiply line 32 by the percentage on line 33 (see 
instructions): (a) Vehicle 1: 2,100; (b) Vehicle 2: ____. 

35. Add lines 31 and 34: (a) Vehicle 1: 6,600; (b) Vehicle 2: ____. 

36. Enter the limit from the table in the line 36 instructions: 
(a) Vehicle 1: 7,660; (b) Vehicle 2: ____. 

37. Multiply line 36 by the percentage on line 14: (a) Vehicle 
1: 5,745; (b) Vehicle 2: ____. 

38. Enter the smaller of line 35 or line 37. Also enter this amount 
on line 28 above: (a) Vehicle 1: 5,745; (b) Vehicle 2: ____. 

END OF FORM 2106

--------------------------------------------------------------------13

Chapter 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.

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 times 
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.

--------------------------------------------------------------------14

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).

--------------------------------------------------------------------15

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.

--------------------------------------------------------------------16 

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

Qualified Vehicle:
Passenger automobile: Placed in service before Sept. 11: $3,060;
Placed in service after Sept. 10: $7,660.

Electric car: Placed in service before Sept. 11: $9,280; Placed
in service after Sept. 10: $23,080. *

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

End of Table

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 
times 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).

--------------------------------------------------------------------17

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 
--------------------------------------------------------------------18
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 minus $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 anyqualified 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 
--------------------------------------------------------------------19
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, 2002


Note: 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 ...

Claim the special depreciation allowance or special Liberty Zone 
depreciation allowance, then you must:

File an amended return by the due date (not including extensions) 
of your return for the year after the year the property was placed 
in service, or

Must file Form 3115, Application for Change in Accounting Method, 
with your return for the year after the year the property was placed 
in service by the due date (including extensions) of your return for 
the year after the year the property was placed in service, and 

Must file a copy of your completed Form 3115 with the IRS 
National Office by the date you file the original Form 3115 with 
your return for the year after the year the property was placed in 
service.

Elect not to claim the special depreciation allowance or the 
special Liberty Zone depreciation allowance, * then you: 

Must have filed your return timely for the year the property was 
placed in service, and; 

Must file an amended return stating you are 
not claiming the allowance by the date that is 6 months after the 
due date of the original return (not including extensions).

Deduct the increased section 179 amount then you must file an 
amended return by the due date (not including extensions) of your 
return for the year after the year the property was placed in 
service.

Use a 5-year recovery period for depreciating qualified Liberty 
Zone leasehold improvement property, then you should file an 
amended return by the date you file your return for the year after 
the year the property was placed in service.

* See also Deemed election under Rules for Returns Filed 
Before June 1, 2002, earlier.

End of Table

--------------------------------------------------------------------20

Chapter 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 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.

--------------------------------------------------------------------21

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-ROM4 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 
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
www.irs.gov.

--------------------------------------------------------------------22

INDEX

403(b) plans (pp. 8) 24
Accounting methods (pp. 5) 14
Acquisition date:
Special depreciation allowance (pp. 14) 53
Special Liberty Zone depreciation allowance (pp. 17) 68
Annuities, tax-sheltered 403(b) plans (pp. 8) 24
Assistance (See Tax help)
Automobile (See Passenger automobile)
Bonds:
New York Liberty (pp. 5) 11
Qualified zone academy (pp. 5) 14
Car (See Passenger automobile)
Car expenses (pp. 9) 28
Catch-up contributions, 403(b) (pp. 8) 24
Child and dependent care (pp. 4) 9
Church employees and ministers (pp. 8) 25
Clean-fuel vehicle (pp. 6) 18
Comments (pp. 2) 4
Credit:
Child and dependent care (pp. 4) 9
Credit for pension plan startup (pp. 6) 17
Electric vehicles (pp. 6) 18
Indian employment (pp. 7) 22
Renewable electricity production (pp. 6) 19
Welfare-to-work (pp. 6) 17
Work opportunity (pp. 6) 16
Deduction limit, automobile (pp. 16) 62
Deemed IRAs (pp. 8) 26
Depletion (pp. 6) 15
Depreciation:
New property (pp. 6) 19
Property on reservations (pp. 7) 22
Special depreciation allowance (pp. 13) 48
Special Liberty Zone depreciation allowance (pp. 16) 63
Supplement to Publication 946 (pp. 13) 46
Election:
Deemed not to claim special allowance (pp. 15) 56
Not to claim special allowance (pp. 15) 56
Not to claim special Liberty Zone allowance (pp. 17) 71
Electric vehicle (pp. 6) 19
Eligible educator (pp. 3) 7
Estimated tax payments (pp. 2) 2
Excepted property:
Special depreciation allowance (pp. 14) 55
Special Liberty Zone depreciation allowance (pp. 17) 70
Foreign missionaries (pp. 8) 25
Form 1099 (pp. 5) 10
Free tax services (pp. 20) 82
Help (See Tax help)
Indian employment credit (pp. 7) 22
Indian reservations, depreciation rules (pp. 7) 21
IRAs (pp. 8) 26
Leasehold improvement property, defined (pp. 14) 55
Liberty Zone leasehold improvement property:
Defined (pp. 14) 52
Depreciated as 5-year property (pp. 18) 77
Returns filed before June 1, 2002 (pp. 19) 78
Liberty Zone property:
Increased section 179 dollar limit (pp. 18) 73
Reduced section 179 dollar limit (pp. 18) 75
Marginal production (pp. 6) 19
More information (See Tax help)
Net operating losses (pp. 3, 5) 5, 10
New York Liberty Zone:
Area defined (pp. 16) 63
Leasehold improvement property (pp. 18) 77
Section 179 deduction (pp. 18) 73
Special depreciation (pp. 16) 63
Tax incentives (pp. 5) 11
Work opportunity credit (pp. 6) 16
NOLs (pp. 3, 5) 5, 10
Nonaccrual-experience method (pp. 5) 14
Nonresidential real property (pp. 17) 67
Passenger automobile, limit on (pp. 16) 61
Pension plan startup costs (pp. 6) 17
Placed in service date (pp. 14, 17) 54, 69
Plans, tax-sheltered annuities, 403(b) plans (pp. 8) 26
Publications (See Tax help)
Qualified leasehold improvement property, defined (pp. 14) 52
Qualified Liberty Zone leasehold improvement property (pp. 14) 52
Qualified property:
Increased section 179 deduction  (pp. 18) 73
Special depreciation allowance (pp. 13) 48
Special Liberty Zone depreciation allowance (pp. 16) 63
Qualified zone academy bonds (pp. 5) 14
Recapture, section 179 deduction (pp. 18) 76
Renewable electricity (pp. 6) 19
Residential rental property (pp. 17) 67
Rollovers, 403(b) plans (pp. 8) 24
Section 1256 contracts (pp. 3) 5
Section 179 deduction:
Increased dollar limit for Liberty Zone property (pp. 18) 73
Reduced dollar limit for Liberty Zone property (pp. 18) 75
Returns filed before June 1, 2002 (pp. 18) 72
Simplified employee pensions (SEPs) (pp. 8) 23
--------------------------------------------------------------------23
Special depreciation allowance:
Election not to claim (pp. 15) 56
Excepted property (pp. 14) 55
Qualified property (pp. 13) 50
Requirements for claiming (pp. 13) 48
Returns filed before June 1, 2002 (pp. 15) 57
Tests for qualification (pp. 14) 53
Special Liberty Zone depreciation allowance:
Election not to claim (pp. 17) 71
Excepted property (pp. 17) 70
Qualified property (pp. 16) 65
Requirements for claiming (pp. 16) 63
Returns filed before June 1, 2002 (pp. 18) 72
Tests for qualification (pp. 17) 68
Substantial use, special Liberty Zone depreciation allowance (pp. 17) 69
Suggestions (pp. 2) 4
Tax help (pp. 20) 82
Tax-sheltered annuity plans, 403(b) plans (pp. 8) 26
Taxpayer Advocate (pp. 20) 82
Teachers, classroom materials (pp. 3) 6
Tests for qualification (pp. 14, 17) 53, 69
TTY/TDD information (pp. 20) 85
Wash sale rules (pp. 3) 5
Welfare-to-work credit (pp. 6) 17
Withholding (pp. 2) 2
Work opportunity credit (pp. 6) 16
Years of service, church employees and ministers (pp. 8) 25

THE END

