On Friday, October 22, 2004, the American Jobs Creation Act of 2004 (the "Jobs Creation Act" or "Act") was signed into law by President Bush. This major tax legislation adds or extends a number of significant tax breaks for businesses and taxpayers of all kinds--ranging from construction companies to engineering firms to restaurants to film production companies. We wanted to take this opportunity to make you aware of some of these tax breaks and their effective dates and also warn you about some of the revenue-raising provisions in the Act that may adversely affect you or your business.

Among other things, the Jobs Creation Act adds or extends the following tax breaks:

  • A provision granting a deduction for manufacturing activities that take place in the United States. "Manufacturing" is defined very broadly for purposes of this new provision, so that many businesses that would not typically think of themselves as manufacturers, such as construction, engineering, energy production, computer software, and film production companies, may qualify for the deduction. This deduction will be phased in between 2005 and 2010, and is intended to replace the benefits of the extraterritorial income (ETI) exclusion regime for American goods sold abroad that was ruled illegal by the World Trade Organization and is repealed by the Act.
  • A provision permitting film and television production companies to deduct certain production expenditures in the year the expenditure is incurred instead of depreciating the expenditures over an extended period of time. This provision applies to qualified film and television productions that begin after the date of enactment.
  • A provision that allows certain participations and residuals to be included in the adjusted basis of motion picture films, sound recordings, and other eligible property when computing the depreciation deduction on such property under the income forecast method. This provision applies to property placed in service after the date of enactment.
  • Provisions that allow for accelerated depreciation of certain "qualified leasehold improvements" and "qualified restaurant property" placed in service after the date of enactment and before January 4, 2006.
  • A provision extending through 2007 previously-enacted legislation that increased the Code Section 179 small business expensing allowance from $25,000 to $100,000, subject to phase-out if more than $400,000 of property is placed in service during the year. (However, see the list of revenue-raising provisions below for a description of the new limit on expensing the cost of large SUVs.) This provision also extends the annual indexing of these amounts based on inflation--for 2004, the annual expensing allowance is $102,000 and the phase-out begins once more than $410,000 of property is placed in service.
  • A provision extending through December 31, 2005 the current law that allows businesses to take an immediate deduction for certain "qualified environmental remediation expenditures" rather than depreciate such expenditures over an extended period of time.
  • A provision allowing an "above-the-line" deduction for attorneys' fees paid in connection with actions involving a claim of unlawful discrimination, certain claims against the Federal Government, or a private cause of action under the Medicare Secondary Payer statute. This provision applies to fees paid after the date of enactment on any judgment or settlement occurring after such date.

The Act also includes many revenue-raising provisions that may affect you or your business. For example, the Act:

  • Places certain limits on deductions for entertainment expenses incurred in the trade or business context, including limits on deductions for the personal use of an airplane by certain executives and other highly- compensated employees. These limits apply to expenses incurred after the date of enactment.
  • Enacts important changes to the rules governing partnership distributions and transfers of partnership interests, including disallowing losses on certain partnership interest transfers. These changes, which apply to distributions and transfers after the date of enactment, also apply to limited liability companies ("LLCs") because LLCs are generally treated as partnerships for tax purposes.
  • Places certain restrictions on the use of nonqualified deferred compensation plans to allow employees to defer tax on their compensation income. These provisions generally take effect in 2005, although amounts deferred in taxable years beginning before 2005 are subject to the new provisions if the plan under which the deferral is made is modified after October 3, 2004.
  • Enacts certain rules designed to prevent taxpayers from avoiding U.S. taxes by giving up their U.S. citizenship or residency or by moving operations offshore. These changes apply to individuals who relinquish citizenship or terminate their U.S. residency after June 3, 2004.
  • Caps the annual depreciation deduction on certain large SUVs (i.e., SUVs weighing between 6,001 pounds and 14,000 pounds) at $25,000, effective for vehicles placed in service after the date of enactment. (The depreciation of SUVs weighing 6,000 pounds or less was already subject to more stringent limitations under current law.)
  • Limits the amount of the charitable contribution deduction that can be claimed when contributing certain types of property (e.g., intangible property, automobiles, boats, airplanes) to charities. The intangible property limitations apply to contributions made after June 3, 2004, while the vehicle limitations apply to contributions made after December 31, 2004.
  • Extends through 2005 the current limits on deductions for charitable contributions of computer equipment and related technology to educational organizations.
  • Expands the provisions that apply to tax shelter transactions, including imposing stricter reporting obligations and increasing the penalties that apply to "promoters" or investors who fail to disclose their involvement in abusive tax shelter transactions as required by law. The various changes to the tax shelter provisions have several different effective dates.

In addition to the provisions described above, the Jobs Creation Act modifies in many significant respects the rules that apply to S corporations and businesses with international operations. For example, the Act increases the number of permitted S corporation shareholders from 75 to 100, allows all members of a family to elect to be treated as one shareholder for purposes of the 100-shareholder requirement, and offers relief for inadvertent invalid subchapter S subsidiary elections and terminations. Among the changes on the international side are provisions that will change the manner in which many taxpayers calculate their foreign tax credits, provisions that substantially modify the rules that apply to U.S. shareholders in "controlled foreign corporations," and a provision that eliminates the U.S. withholding tax that currently applies when certain foreign corporations with substantial U.S. operations pay dividends to foreign shareholders. Most of the Subchapter S changes take effect in 2005, but the changes to the international tax provisions are many and have a number of different effective dates.

The provisions of the Jobs Creation Act that are described in this memorandum represent a mere sampling of the tax breaks and other changes enacted under the Act, and in addition to any of the foregoing provisions that may affect you or your business, there may be other provisions in the Act that may be of interest to you. If you would like additional detail regarding any of the provisions of the Act described in this memorandum or you would like to discuss whether there are other provisions in the Act that may apply to you or your business, please do not hesitate to contact Katharine Davidson or Mark Saulino.

The material discussed in this memorandum is meant to provide general information and is not intended to serve as legal or tax advice. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Alschuler Grossman Stein & Kahan LLP does not accept responsibility for any loss arising from any action taken or not taken by any person or entity in reliance on this memorandum.