AMERICAN JOBS CREATION ACT OF 2004

In October 2004 the American Jobs Creation Act of 2004 was passed.  While many tax breaks were business-oriented, there were several important tax issues also addressed for individuals.

The main purpose of this bill was to respond to sanctions imposed by the World Trade Organization.  It was intended to compensate exporters for repeal of a $50 billion tax based trade subsidy.  Unfortunately, when Congress got through with it, it ballooned into a $145 billion pork barrel subsidy.  It should be called the No Special Interest Left Behind Tax Act.

Some provisions impacting our clients are as follows:

·           Creates a new tax deduction for “manufacturers”

·           Extends special depreciation rules

·           Reduces SUV loophole

·           Allows deduction of sales taxes

·           Tightens vehicle donation rules

·           Changes depreciation and amortization rules

·           Changes S-Corporation rules

·           Simplifies international taxation

·           Boosts tax shelter penalties

·           Provides tax relief to farmers

If you thought tax law was complex before, wait until you see this one.  There are 173 provisions inside this Act, causing 274 amendments to the IRS code, and with several phase-in dates.

For Manufacturers

·           Manufacturers receive a production activity deduction of 3% starting in 2005, gradually growing to 9% by 2010.  This effectively drops the top tax rate for manufacturers from 35% to 32%.

·           Definition of a manufacturer has been expanded and includes construction, engineering, energy production, computer software, films and videotape, and processing of agricultural products.

Depreciation

·           Previously, Section 179 depreciation was increased from $25,000 to $100,000 (indexed).  This provision was extended through 2007.

·           In 2004, the Section 179 limit is $102,000, with a phase-out if purchases exceed $410,000 during the year.

SUV Loophole

·           Vehicles weighing more than 6,000 pounds could be fully deductible under old Section 179 rules.  Now this only applies to vehicles weighing 14,000 pounds.

·           For vehicles less than 14,000 pounds, the maximum 179 depreciation is $25,000, not $102,000.

Sales Tax Deduction

·           There are 7 states that don’t have an income tax.  In those states you can now deduct sales tax.

·           Taxpayers can deduct the greater of income taxes paid or sales taxes paid.  For those who have several major purchases during the year, the sales tax deduction might be more valuable.

Vehicle Donation

·           Using Blue Book value to donate a car to charity will only be allowed if the charity uses the car. 

·           Once the charity sells your donated vehicle, they will give you a receipt and then your deduction is limited to what the charity actually received from selling the car.

Depreciation and Amortization

·           From 10/22/04 to 1/1/06, the write-off period for leasehold improvements has been shortened from 39 years to 15 years.

·           Starting immediately, the write-off period for organizational and start-up costs increase from 60 months to 15 years.

S-Corporation

·           Number of shareholders increases from 75 to 100.

·           For purposes of counting the number of shareholders, all family members are considered one member.

·           Roth IRAs can hold shares in a bank that is an S-Corporation.

·           Suspended losses or deductions to be transferred to spouse, incident to divorce.

International Taxation

·           Most of this tax bill was aimed at giving breaks to businesses with international operations.

·           Details of this are too numerous to summarize here.

Tax Shelter Penalties

·           Failure to disclose participation in abusive tax transactions will result in higher fines and penalties ($10,000 for individuals).

·           Tax shelter promoters and participating corporations have higher possible penalties ($50,000-$200,000).

·           The Confidentiality Provision does not protect tax shelter discussions with your CPA.

Farmer Tax Relief

·           Farmers are considered “manufacturers”, subject to a lower tax rate.

·           Farmers and fisherman may use income averaging.

·           There are over 20 agricultural tax breaks and incentives, too numerous to summarize here.

*   *   *   *   *

This is only a brief outline and is not as a substitute for counseling on your particular tax situation.  If you have any questions, please contact your personal advisor, or call us for clarification.

Arnow & Associates

7402 North Seneca Road

Fox Point, Wisconsin 53217

(414) 964-4000

info@arnow.com

 AGEN633  10/21/04