Job Creation and Worker Assistance Act of 2002 (Bonus Depreciation Origin)

Where this comes from

Before 2002, bonus depreciation did not exist in the modern tax code. You depreciated every asset on its normal schedule. A 5-year piece of equipment took 5 years. There was no extra first-year write-off.

Congress passed this law in the wake of the September 11 attacks to encourage business investment. The idea was simple: give businesses a bigger deduction today in exchange for placing qualifying property in service quickly. That cash-flow incentive is the logic behind bonus depreciation, and it runs through every version of the rule that came after.

What it established

Section 101 of the law added Section 168(k) to the Internal Revenue Code. That section authorized a 30% additional first-year deduction for qualified property.

Qualified property had to meet three conditions: it had to be property with a recovery period of 20 years or less under MACRS (so 5, 7, 15-year property and similar classes), its original use had to begin with the taxpayer after September 10, 2001, and it had to be placed in service before January 1, 2005.

The 30% applied on top of the regular first-year depreciation. If you had $100,000 of 5-year property, you took $30,000 in bonus immediately, then depreciated the remaining $70,000 on the normal 5-year schedule.

How it shows up in a study

A cost segregation study separates a building's cost into components. The components classified as 5, 7, or 15-year property qualify for whatever bonus rate was in effect when they were placed in service.

For a building placed in service between September 11, 2001, and May 5, 2003, the applicable bonus rate was 30% under this law. For a building placed in service after May 5, 2003, the rate jumped to 50% under the 2003 law.

Knowing the placed-in-service date and the applicable law for that period is part of accurate study work. The study's benefit calculation depends on applying the right rate for the right window.

What it does not mean

The 30% rate is historical. It applied to property placed in service between September 2001 and January 2005. Later laws raised the rate, let it lapse, brought it back, and eventually took it to 100% before it began phasing down again.

This law also required original use to begin with the taxpayer. That means used property generally did not qualify for the 30% bonus under this first version of Section 168(k). Later laws changed that too, but not this one. A cost segregation study on a used building placed in service in 2003 would not have qualified its reclassified components for this first bonus rate.