As you probably know, Congress recently passed the American Jobs Creation Act of 2004, which replaces the U.S. export tax regime with broad-based tax relief for domestic manufacturing, U.S. multinationals, and a wide variety of other businesses and industries. Here's what you need to know right now about this important new legislation:

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New deduction for U.S. production activities.

The Act includes a new tax break for domestic production activities. The deduction is a percentage of the net income from those activities—3% in 2005-2006, 6% for 2007-2009, 9% after 2009.

The U.S. production activities deduction is allowed with respect to a taxpayer's qualified production activities income, which is the taxpayer's domestic production gross receipts net of expenses. “Domestic production gross receipts” are receipts derived from any of the following:

Any lease, rental, license, sale, exchange, or other disposition of:

• qualifying production property (i.e., tangible personal property, any computer software, and certain sound recordings) that was manufactured, produced, grown, or extracted in whole or in significant part by the taxpayer within the U.S.;
• any qualified film produced by the taxpayer; or
• electricity, natural gas, and potable water produced by the taxpayer in the U.S.
• Construction performed in the U.S.;
• Engineering and architectural services performed in the U.S. for construction projects in the U.S.

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The deduction is available to all taxpayers with qualified production activities income. For pass-thru entities (such as S corporations, partnerships, estates and trusts), the deduction generally is determined at the shareholder, partner or similar level by taking into account at that level the proportional share of the qualified production activities income of the entity. The deduction is allowed for AMT purposes.

Business tax incentives In addition to the new deduction for U.S. production activities, the Act spreads billions of dollars of tax breaks throughout the business world. These include:

• an extension of enhanced Code Sec. 179 expensing so that qualifying businesses can immediately expense over $100,000 (with indexing) of new investments through 2007.
• 15-year writeoff for qualifying leasehold improvements and restaurant property.
• a number of provisions that make it easier for businesses to qualify and operate as S corporations, including raising the maximum number of shareholders from 75 to 100 and allowing family members to be counted as one shareholder.

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Deduction of state and local general sales taxes

In a move that will primarily benefit individuals in states with sales taxes but with no or limited individual income taxes (i.e., Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming), taxpayers, who itemize, will be able to deduct on their federal tax returns for 2004 and 2005 either what they pay in state and local income taxes or what they pay in sales taxes. Previously, only state and local income tax payments were deductible. Taxpayers who itemize may deduct their actual sales taxes or use IRS-published tables.

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Miscellaneous provisions

The Act also:

• limited the amount of the cost of an SUV that may be expensed to $25,000, effective for vehicles placed in service after Oct. 22, 2004.
• allows an above-the-line deduction for attorney's fees and court costs incurred in connection with an unlawful discrimination claim.
• excludes certain stock options from employee wages for FICA/FUTA withholding purposes.

Please keep in mind that we’ve described only the highlights of the most important changes in the new law. Give us a call at your earliest convenience for more details on how you may be affected by this important tax legislation.

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