The American Jobs Creation Act of 2004 (AJCA), signed into law on October 22, 2004, creates new tax breaks for businesses and individuals, closes certain loopholes, and implements some revenue-raising provisions. The new law, which was originally intended to put an end to subsidies benefiting U.S. exporters that have been deemed illegal by the World Trade Organization (WTO), contains numerous "domestic production incentives" and other new benefits for manufacturers, farmers, corporations and other diverse business groups. It is the most far-reaching piece of corporate legislation passed by Congress in nearly two decades.Increased Section 179 Expensing Extended
AJCA extends for two additional years the Section 179 expensing limit that was quadrupled by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). In 2005, small businesses can write off up to $105,000 on purchases of qualifying property. This amount was scheduled to drop to $25,000 in 2006, but AJCA extends the increase through 2008, with amounts subject to inflation indexing. Bear in mind that JGTRRA added off-the-shelf computer software to the list of eligible property. In 2005, the deduction starts to phase out if more than $420,000 of equipment is put into service in a single tax year, and this amount will also be subject to inflation indexing in the coming years.SUV Loophole Closed
Under the new law, small business owners will no longer be permitted to apply the full Section 179 expensing limit to the purchase of certain types of SUVs. Previously, first-year expensing could be used in lieu of the much less generous depreciation provisions that apply to most cars used for business purposes. The revised rules call for a deduction of no more than $25,000 for an SUV that weighs between 6,000 lbs. and 14,000 lbs. This provision applies to vehicles placed in service after the date of enactment.S Corporation Reform
A simplification of the rules affecting S corporations is another aspect of the new law likely to be of interest to small business owners. The number of permissible S corporation shareholders has been increased from 75 to 100. Furthermore, members of the same family may be treated as a single shareholder in an S corporation, and the new law clarifies what constitutes a "family." These and other changes to the rules should add to the popularity of the S corporation as a business entity option, especially among small, family-run businesses.New Rules for Nonqualified Deferred Compensation Plans
While nonqualified deferred compensation plans are broadly defined by AJCA as any plan that defers compensation, it is important to note that qualified retirement plans, tax-deferred annuities, and 457(b) plans are not subject to these new regulations. Limiting the flexibility of distributions, this legislation stipulates that nonqualified deferred compensation must be included as income at the time of vesting unless certain conditions are met. Noncompliance will result in penalties. AJCA also limits the effective use of offshore rabbi trusts. While some plans may already comply with the changes, it is important to review your arrangement to see if revision is necessary.ETI Regime Repealed
In response to European Union (EU) sanctions on U.S. exports, AJCA schedules the gradual repeal of the extraterritorial income (ETI) regime, which the EU and the World Trade Organization (WTO) consider an illegal export subsidy. With ETI rules in effect, the EU levies heavy tariffs on American businesses manufacturing goods domestically and then exporting them. In 2005, businesses may claim 80% of their ETI benefit. In 2006, the allowable amount drops to 60%, with total repeal scheduled for 2008.Benefits for Manufacturers
AJCA provisions expand the definition of "manufacturer" to include more types of production and create a new deduction. The deduction phases in, and in 2005 and 2006, businesses will be allowed to deduct 3% of the lesser of their income from qualified production activities or their taxable income. The allowable deduction jumps to 6% for 2008 through 2009, and will be 10% in 2010. Qualified activities now include certain types of film and video, computer software, and energy production, as well as certain agricultural processing, construction, engineering, and architectural activities.State Sales Tax Deductions Allowed
For individuals, AJCA includes a provision that allows certain taxpayers to claim state and local sales taxes as an itemized deduction in lieu of state and local income taxes for 2005. This will have the greatest impact on people living in states with no income tax or very high sales taxes. The new deduction must be itemized, and cannot be claimed by taxpayers subject to the alternative minimum tax.New Restrictions for Vehicle Donations
In a revenue-raising measure, AJCA restricts the deduction for vehicles donated to charity valued in excess of $500, beginning in 2005. If the charity sells the vehicle, the taxpayer's deduction may not exceed the gross proceeds received by the charity. In the event the charity retains the vehicle for its own use, the taxpayer is responsible for substantiating how the vehicle will be used and for how long. Prior to AJCA, taxpayers could write off the full blue book value of the car regardless of how the charity managed the donation.
AJCA is a complex, expansive bill. For more information on how you may be affected, please give us a call.