2004 American Jobs Creation Act: selected highlights

California CPA, Dec, 2004 by Stuart R. Josephs

The following are selected highlights of the 2004 American Jobs Creation Act, signed into law Oct. 22.

Extraterritorial Income (ETI) Exclusion Repealed

The Act repeals the ETI exclusion for post-2004 transactions, subject to 2005 and 2006 transaction relief (see Box 1) and grandfather rules for binding contracts in effect on Sept. 17, 2003 and at all times thereafter.

New Deduction Regarding Domestic Production Activities

For tax years beginning after 2004, the Act provides a new 9 percent regular tax deduction, equivalent to a 3 percent tax rate reduction, relating to income attributable to domestic manufacturing and certain other production activities.

This deduction will be available for C and S corporations, partnerships, sole proprietorships, estates, trusts and cooperatives--as well as for AMT purposes.

Many domestic production activities will qualify for this new deduction, including, but not limited to, traditional manufacturing; construction; engineering; energy production; computer software; films and videotape; and processing of agricultural products.

The deduction cannot exceed 50 percent of an employer's W-2 wages for any tax year. A five-year phase-in applies, as shown in Box 1.

Extension of Increased Sec. 179 Deduction for Small Business

The new law extends the increases and other changes enacted by the 2003 tax law to the Sec. 179 small-business expense deduction, for two more years, through tax years beginning in 2006 and 2007.

Therefore, the maximum amount that may be deducted under Sec. 179 will be $100,000 for qualifying property placed in service in tax years beginning after 2002 and before 2008, and $25,000 thereafter.

The $100,000 maximum deduction is reduced by the amount by which the cost of such property exceeds $400,000 for tax years beginning after 2002 and before 2008, and $200,000 thereafter.

These $100,000 and $400,000 limitations are indexed for inflation for tax years beginning after 2003 and before 2008. For 2004, these limitations are $102,000 and $410,000, respectively.

Off-the-shelf computer software placed in service in a tax year beginning after 2002 and before 2008 will be qualifying property.

Taxpayers can make or revoke Sec. 179 expense deduction elections on amended returns without IRS consent for tax years beginning after 2002 and before 2008. However, any such revocation is irrevocable.

Reduced Sec. 179 Deduction for SUVs

The new law limits the Sec. 179 expense deduction for SUVs placed in service after Oct. 22, 2004 to not more than $25,000 (for any tax year).

An SUV is any four-wheeled vehicle designed, or which can be used, to carry passengers over public streets, roads or highways (except any vehicle operated exclusively on a rail or rails); not subject to Sec. 280F; and rated at not more than 14,000 pounds gross vehicle weight.

Sec. 280F applies only to vehicles rated at 6,000 pounds unloaded gross vehicle weight or less.

Under the new law, SUVs do not include any vehicle which:

* Is designed to have a seating capacity of more than nine persons behind the driver's seat;

* Is equipped with a cargo area of at least six feet in interior length which is in an open area or designed for use as an open area--but is enclosed by a cap and is not readily accessible directly from the passenger compartment; or

* Has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat and has no body section protruding more than 30 inches ahead of the wind-shield's leading edge.

Charitable Contributions of Motor Vehicles, Boats and Airplanes ("Vehicles")

For vehicles, except inventory, contributed after 2004, the new law generally allows a charitable deduction if the claimed value exceeds $500 and if the taxpayer substantiates this contribution with a written acknowledgement from the charitable donee and attaches such acknowledgement to the taxpayer's tax return claiming that deduction.

In addition, if the donee sells the vehicle without the donee's significant intervening use or material improvement of the vehicle, the charitable contribution deduction cannot exceed the gross sale proceeds.

This acknowledgement must contain the donor's name, taxpayer identification number and vehicle identification number.

If the donee sells the vehicle without any significant intervening use or material improvement, the acknowledgement also must contain:

* A certification that the vehicle was sold in an arm's length transaction between unrelated parties;

* The sale's gross proceeds; and

* A statement that the deductible amount may not exceed the amount of these gross proceeds.

Otherwise, the acknowledgement must contain this alternative information: a certification of the vehicle's intended use or material improvement and the intended duration of such use, and a certification that the vehicle would not be transferred in exchange for money, other property or services before completion of such use or improvement.