“New Tax Act Fuels Acquisition and Expansion”		«BACK
	by Dennis L. Monroe with Scott G. Husaby and John E. Berg
	from Franchise Times, May 2002 Issue

Depreciation Bonus. The most promising provision of the Act is the introduction of a depreciation bonus. This provision provides for an additional 30 percent first-year depreciation deduction for most new tangible personal property, computer software and certain leasehold improvements acquired after September 10, 2001 and before September 11, 2004, and placed in service prior to January 1, 2005. There is a narrow exception for certain constructed property if it is placed in service before January 1, 2006. In order to be eligible for the depreciation bonus, eligible property must be subject to regular MACRS depreciation rules and: (i) have a depreciable life of 20 years or less, (ii) be computer software that is normally depreciated (as opposed to amortized); or (iii) be improvements to commercial real estate that are placed in service more than three years after the building itself was first placed in service. This means the normal franchise unit will provide to the owner depreciation benefits for new furniture, fixtures, equipment, leaseholds and point of sale.

Taxpayers may generally take the existing first year write off (Section 179 expense deduction), the new bonus depreciation deduction, and the normal depreciation deduction in the first year, calculated in that particular order. The following example shows just how meaningful the combination of these three depreciation provisions can be.

Example: Assume your business purchases and places in service equipment costing $100,000. The equipment would first be eligible for the Section 179 expense deduction in the amount of $24,000. The new bonus depreciation provision would then allow a deduction equal to 30 percent of the remaining basis ($100,000 - $24,000 = $76,000) equal to $22,800. Finally, the business would also be allowed the normal first-year depreciation deduction calculated on the remaining cost basis of $53,200.

Change to the Net Operating Loss Deduction. In light of all of the troubled units, the other provision of the Act that will have an impact on the franchise community is a change to the net operating loss deduction. Under prior law, net operating losses could generally be carried back only two years. The Act provides that net operating losses generated in tax years ending in 2001 or 2002 may be carried back five years. For businesses that have paid tax in the past but will incur a loss in 2001 or 2002 due to the economic downturn, this additional carryback can allow taxpayers to generate refunds for taxes paid in previous years. This additional cash can be used to even out recent economic performance or be used to invest in growth. This carryback provision also creates the potential for an additional benefit that may add value to acquisitions. Your tax advisers should be consulted to determine whether the new provision may create additional tax benefits in recent or upcoming transactions.

Extension of the Work Opportunity and Welfare-to-Work Tax Credits. Another change made by the Act that may provide an incentive to expanding your business is the extension of the Work Opportunity Tax Credit and the extension of the Welfare-to-Work Credit. These credits are intended to encourage businesses to employ workers belonging to certain targeted groups. Several of our clients have utilized these credits to generate tax benefits and the extension of these programs allows for the continued enjoyment of these benefits.

While the recent economic downturn has seriously slowed the acquisition and growth activity in the multi-unit retail industry, we have seen an increase in this area in recent months. Our belief is that the economic incentives provided by the Act are well-timed and can provide important economic benefits to businesses on a growth track.