American Jobs Creation Act Of 2004 — A Summary

On October 22, 2004, President Bush signed into law the American Jobs Creation Act of 2004 (AJCA). The law is intended, among other objectives, to spur the creation of jobs by providing tax incentives to businesses. The law also contains several individual tax provisions that will affect many taxpayers.

Individual Tax Provisions 

Itemized Deduction for Sales Taxes. AJCA provides individuals the option of claiming an itemized deduction for state and local general sales and use taxes instead of deducting state and local income taxes. For 2004 and 2005, taxpayers may make the election by claiming either (1) the actual sales and use taxes they paid during the year or (2) an amount from an IRS-provided table. Taxpayers may add to the table amount the sales taxes paid on motor vehicles, boats, and other IRS-specified items.

Charitable Donation of Vehicles. To address what Congress felt were abuses of the tax law, AJCA tightens up the rules governing the deduction for donations of vehicles to charities, effective for donations after 2004. The new law limits the charitable contribution deduction for donations of motor vehicles (as well as boats and airplanes) for which the claimed value exceeds $500. In general, the deduction is limited based on the charity’s use of the gifted item and more documentation of the gift is required. For example, if the charity sells a donated vehicle without having used it in a significant way or materially improving it, the deduction is generally limited to the amount of the gross proceeds from the charity’s sale (as opposed to the vehicle’s fair market value).

Deduction for Wrongful Discrimination Claim Expenses. Under AJCA, legal fees and court costs incurred with respect to an unlawful discrimination claim paid after October 22, 2004 (with respect to a judgment or settlement after that date) are deductible by the taxpayer as an “above the line” deduction. Therefore, the deduction is allowed even if the taxpayer does not itemize deductions. The deduction cannot exceed the amount includable in the taxpayer’s gross income due to the judgment or settlement of a qualifying claim.

Nonqualified Deferred Compensation. These arrangements, typically set up to provide supplemental retirement income for executives, take a hit under the new law. AJCA tightens up the rules governing when distributions from nonqualified plans will be allowed. In addition, the law provides for retroactive interest and a 20% penalty on early distributions that don’t meet the law’s requirements. The new rules apply to deferrals made after 2004 as well as to amounts deferred in tax years beginning before 2005 if the plan is materially modified after October 3, 2004. All plan sponsor-employers and plan participants should review their nonqualified deferred compensation arrangements now to determine the impact of the new rules.

Business Tax Provisions 

Deduction for Domestic Production Activities. AJCA introduces a new tax deduction for a percentage of business income earned from manufacturing and certain other production activities occurring in the U.S. The deduction is available to all regular C corporations, S corporations, partnerships, cooperatives, sole proprietorships, and estates and trusts. The deduction will rise in steps from 3% in 2005 and 2006 to 9% in 2010 and later. The activities giving rise to the deduction are broad ranging and will affect those engaged in almost every aspect of domestic manufacturing or production, domestic construction activities, or engineering or architectural activities for construction projects occurring in the U.S. (some exceptions apply). The deduction is complicated and planning is essential. Contact us for more details.

Enhanced Section 179 Expensing. Section 179 of the tax law allows taxpayers to immediately deduct the cost of a limited amount of eligible property purchased for use in a trade or business, instead of writing off the property’s cost over its depreciable life. A previous tax law expanded the Section 179 deduction limit from $25,000 to $100,000 for 2003 through 2005. The limit on overall annual asset purchases (above which the allowable Section 179 deduction is reduced dollar-for-dollar) also was increased from $200,000 to $400,000. Both numbers are adjusted for inflation. AJCA extends the period the enhanced Section 179 limits are in effect for an additional two years, through 2007. (For 2004, the inflation-adjusted limits are $102,000 and $410,000, respectively.)

S Corporation Reforms. The new law makes several changes affecting S corporations, generally effective for tax years beginning after 2004. For example, the number of eligible shareholders increases from 75 to 100 and family members can elect to be treated as a single shareholder for purposes of meeting the 100-shareholder limit.

Deduction for Organizational and Start-up Costs. Under AJCA, a corporation may elect to deduct up to $5,000 of the organizational costs (legal and accounting fees, incorporation fees, etc.) of setting up the company. The $5,000 limit is reduced dollar for dollar when total organizational expenses exceed $50,000. The nondeductible expenses can be written off ratably over 15 years. A similar rule applies to start-up expenses (advertising, pre-operation salaries, etc.).

Talk to Us 

This is only a brief summary of the new law. There are many other provisions that may affect you. Before acting on any of this information, talk to one of our professionals. We can help you apply the law to your specific situation.

The information provided in the newsletter has been obtained from sources believed to be reliable but its accuracy is not guaranteed.