The American Jobs Creation Act of 2004 - Businesses

Newsletter
January 13, 2005

This newsletter continues very broad overview of The American Jobs Creation Act of 2004. This Newsletter focuses on those provisions that primarily affect businesses. The next Newsletter will focus on those provisions that primarily affect individuals.

  1. The small business expensing allowance allows businesses to deduct certain asset purchases in the year of purchase rather than taking a depreciation deduction over a period of years. This deduction was previously increased from $25,000 to $100,000 for 2003 through 2005. The Act extends the $100,000 deduction limit through 2007 (so that the maximum deduction was actually $102,000 in 2004), and added off-the-shelf software as eligible property. For taxable years beginning after 2007, the dollar amount of the deduction will again be limited to $25,000. It also increased the level at which the deduction is "phased out" for investments in business property to $400,000 (from $200,000), with annual inflation adjustments (so that the phase out started at $410,000 in 2004). If more than $410,000 was invested in business property in 2004, the $100,000 deduction is reduced by the amount invested over the $410,000 limit.
  2. Previously, SUVs weighing more than 6,000 pounds were not subject to the limitations on deductions imposed on "luxury" automobiles because their weight classified them as trucks, not "passenger" automobiles, under the Internal Revenue Code. The new law creates a separate category for such SUVs (including those rated at a gross vehicle weight of not more than 14,000 pounds) and imposes a $25,000 limit on the deduction.
  3. The Act also made S corporations more attractive. Among other things, the new law:
    • treats certain family members as one shareholder for purposes of the limit on the number of eligible shareholders;
    • increases the number of eligible shareholders to 100; and
    • provides relief from inadvertently invalid qualified subchapter S subsidiary ("QSST") elections.
  4. A deduction for businesses having income "attributable to domestic production activities" is expected to apply to about 10% of all U.S. companies. This applies to U.S. based manufacturing activities. In addition to traditional manufacturers, any business might qualify if it meets 4 criteria. The company must:
    1. produces, grows, or extracts,
    2. "in whole or in significant part within the United States,"
    3. any tangible personal property, computer software, or sound recordings; and
    4. derive income from any "lease, rental, license, sale, exchange, or other disposition of such property."
    A business could also qualify by:
    • performing construction in the United States; or
    • performing engineering or architectural services in the United States for construction projects in the United States; or
    • producing electricity, natural gas, or potable water in the United States; or
    • producing films for which at least 50% of the total compensation was paid for services in the United States.
    The deduction is available to sole proprietors, partnerships, LLCs, S-Corporations and C Corporations.
  5. One of the most important parts of the Act enacts new rules for companies with foreign business activities. However, since this will not apply to most of you, I will not go into detail, but simply highlight the major changes. The Act:
    • simplifies the foreign tax credit rules;
    • provides a 10-year carryforward and one-year carryback of the foreign tax credit;
    • repeals the 90% limitation on using foreign tax credits against the alternative minimum tax;
    • provides a temporary incentive in the form of an 85% dividends received deduction for corporations to "repatriate" their foreign earnings within a limited timeframe; and
    • repeals the foreign personal holding company and foreign investment company rules.

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