Highlights of new tax law, the “American Jobs Creation Act of 2004”

It is mainly directed toward large businesses, the wide-ranging law has several provisions affecting individuals and small or closely-held businesses. 

Incentives, pro-taxpayer provisions:      

bulletcreates a new deduction for businesses having income “attributable to domestic production activities”; In addition to traditional manufacturers, any business might qualify if it: (1) produces, grows, or extracts, (2) “in whole or in significant part within the United States,” (3) any tangible personal property, computer software, or sound recordings; and (4) derives income from any “lease, rental, license, sale, exchange, or other disposition of” such property.  Other qualifying activities include: performing construction in the United States; performing engineering or architectural services in the United States for construction projects in the United States; producing electricity, natural gas, or potable water in the United States; producing films for which at least 50% of the total compensation was paid for services in the United States.
bulletextends previously-enacted increases in the small business “expensing” allowance;
bulletliberalizes the rules governing S corporations; Among other things, the new law: treats certain family members as one shareholder for purposes of the limit on the number of eligible shareholders; increases the number of eligible shareholders to 100;
bulletpermits itemizers to deduct their state and local sales taxes in lieu of state and local income taxes (effective for tax years 2004 and 2005);
bulletsimplifies the foreign tax credit rules; Among other things, the new law: provides a 10-year carryforward and one-year carryback of the foreign tax credit; repeals the 90% limitation on using foreign tax credits against the alternative minimum tax (AMT); provides a temporary incentive in the form of an 85% dividends received deduction for corporations to “repatriate” their foreign earnings within a limited timeframe; repeals the foreign personal holding company and foreign investment company rules;
bulletprovides for income and excise tax credits for biodiesel used in certain fuel mixtures;
bulletincludes a provision allowing fishermen—in addition to farmers—to use income averaging, and providing that income averaging will not increase alternative minimum tax (AMT) liability (effective retroactively to January 1, 2004);
bulletincludes a deduction for the first $10,000 of qualified reforestation expenditures (effective for expenditures paid or incurred after the date of enactment).

Other changes:

bulletlimits the “expensing” allowance for sport utility vehicles (SUVs) placed in service after the new law’s enactment date to $25,000;
bulletstarting January 1, 2005, imposes tighter rules on taxpayers who want to claim a deduction of more than $500 for motor vehicles, boats, or airplanes donated to charity;
bulletimposes tighter rules on charitable donations of intellectual property, i.e., patents, copyrights and similar property, made after June 3, 2004;
bulletdramatically toughens the rules for “nonqualified” deferred compensation plans, which are used by business owners and other executives as a supplement to, or in lieu of, the “qualified” retirement plans generally available to a business’s employees. The new law imposes requirements on NQDC plans with regard to participant elections, distributions, acceleration and funding that likely will necessitate amendments to most NQDC plans;
bulletto offset the projected revenue losses from the pro-taxpayer changes, the new law adds an extensive collection of revenue-raising measures, broken down into four broad categories: expatriation, tax shelters, fuel tax evasion, and “other revenue provisions.”

More detailed information on this new law is available to clients in our forum. Access here.