American Jobs Creation Act of 2004

On Friday, October 22, 2004, President Bush signed into law the "American Jobs Creation Act of 2004 (H.R. 4520)" that includes a number of provisions affecting primarily businesses. However, there is also tax relief for individual taxpayers.

Some of the highlights of the tax-related provisions of this bill include:

• Deduction of state and local sales taxes instead of state income taxes for years 2004 and 2005. Taxpayers can either use actual sales tax paid or IRS tables,

• Extends the enhanced Internal Revenue Code Section 179 expensing amount of $100,000 and the phase-out threshold from $200,000 to $400,000 through year 2007,

• Authorizes the IRS to enter into partial payment installment agreements,

• Closes the expensing loophole for certain sport utility vehicles (SUV's). Expensing is limited to $25,000,

• Reforms S-corporation rules to treat family members as one shareholder and increase number of shareholders to 100,

• Limits the deduction for vehicles, boats, and airplanes contributed to qualifying charities,

• Gain from sale of principal residence acquired in a like-kind exchange within five years of sale is nonexcludable from income.

Below are the details for some of the more popular provisions of the new tax law:

State and Local Sales Tax Deduction

For tax years 2004 and 2005 individual taxpayers can now choose as an itemized deduction "state and local general sales taxes" instead of deducting state and local income taxes.

There are TWO options in calculating the allowable sales tax deduction:

1. Deduct actual amount paid during the tax year based on purchase receipts, OR

2. Use IRS tables

If you choose to use the IRS tables, you can also add to the table amount sales tax paid on certain big ticket items, such as, motor vehicles, boats and other items specified by the Secretary of Treasury.

Limited Charitable Deduction for Vehicles, Boats, and Airplanes

The amount of deduction for charitable contributions of vehicles (generally including automobiles, boats, and airplanes for which the claimed value is greater than $500) will depend upon the use of the vehicle by the donee organization. If the donee organization sells the vehicle without any significant intervening use or material improvement of such vehicle by the organization, the amount of the deduction CANNOT exceed the gross proceeds received from the sale. Therefore, the fair market value (FMV) or blue book value CANNOT be used.

There is a new substantiation requirement for contributions of vehicles for which the claimed value is greater than $500. A deduction will not be allowed unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgement by the donee. The acknowledgement needs to contain the name and taxpayer identification number of the donor and the vehicle identification number (or similar number) of the vehicle. In addition, if the donee sells the vehicle without performing a significant intervening use or material improvement of such vehicle, the acknowledgement will have to provide a certification that the vehicle was sold in an arm's length transaction between unrelated parties, and will have to state the gross proceeds from the sale and that the deductible amount may not exceed such gross proceeds. In all other cases, the acknowledgement will have to contain a certification of the intended use or material improvement of the vehicle and the intended duration of such use, and a certification that the vehicle will not be transferred in exchange for money, other property, or services before completion of such use or improvement.

This is effective for contributions made AFTER December 31, 2004.

Partial Payment of Tax Liability in Installment Agreements

The new law clarifies that the IRS is authorized to enter into installment payment agreements with taxpayers for less than full payment of the tax liability over the life of the agreement, so long as the IRS reviews such agreements at least every two years to determine whether there is a change in financial condition of the taxpayer that will cause an increase in the value of the taxpayer's payments.

This is effective for agreements entered into on or AFTER October, 22, 2004.

Recognition of Gain from the Sale of a Principal Residence Acquired in a Like-Kind Exchange Within Five Years of Sale

The new law makes the exclusion of gain from the sale of a principal residence inapplicable to property acquired in a like-kind exchange during the five-year period before the sale. Thus, the exclusion of gain will NOT apply if the principal residence was acquired in a like-kind exchange in which any gain was not recognized within the previous five years.

This new law is effective for sales or exchanges AFTER October 22, 2004.

Limitation on Depreciation of Certain Passenger Automobiles

The new law reduces (from $102,000 in year 2004) to $25,000 the maximum amount that a small business owner may deduct under Internal Revenue Code Section 179 with respect to the cost of a sport utility vehicle (SUV) purchased for use in the business AFTER October 22, 2004. Therefore, the new law closes the so-called "SUV loophole," which had allowed small business owners to expense (write off), up to $100,000 of the cost of SUV's weighing more than 6,000 pounds. Under the new law, vehicles subject to the $25,000 limit generally would include four-wheeled passenger vehicles that are not subject to the Section 280F luxury automobile depreciation limit and are rated at 14,000 pounds or less gross vehicle weight. However, the new law excludes from the definition of sport utility vehicle:

1. Vehicles designed to seat more than nine persons behind the driver's seat,

2. Vehicles equipped with an open cargo area or a covered box not readily accessible from the passenger compartment, of at least six feet in interior length, and

3. Vehicles that have an integral enclosure fully enclosing the driver compartment and load carrying device, do not have seating behind the driver's seat, and have no body section protruding more than 30 inches ahead of the leading edge of the windshield

Two-Year Extension of Increased Expensing for Small Businesses

The new law extends the increased amount that a taxpayer can deduct, and certain other changes made by the "Job and Growth Tax Relief Reconciliation Act of 2003" for an additional two years. Thus, the new law provides that the maximum dollar amount that may be deducted under Section 179 is $100,000 (indexed annually for inflation) for property placed in service in taxable years beginning before 2008 ($25,000 for taxable years beginning in 2008 and thereafter). In addition, the $400,000 (indexed annually for inflation) reduction in limitation amount will apply for property placed in service in taxable years beginning before 2008 ($200,000 for taxable years beginning in 2008 and thereafter).  The new law also includes as qualifying property for Section 179, off-the-shelf computer software placed in service in taxable years beginning before 2008. Finally, the new law permits taxpayers to revoke expensing elections on amended returns without the consent of the IRS.

This law is effective as of October 22, 2004.

Members of Family Treated as ONE Shareholder for S Corporation

The new law allows all family members to be treated as one shareholder for purposes of determining the number of shareholders in an S corporation. For purposes of the limitation on the number of shareholders in an S corporation, a husband and wife are currently treated as one shareholder, however the new law expands this treatment to "all members of the family," defined as the common ancestor, lineal descendants of the common ancestor, and the spouses (or former spouses) of such lineal descendants or common ancestor. However, an individual that is more than six generations removed from the youngest generation of shareholders is NOT considered a common ancestor.

This law is effective for taxable years beginning after December 31, 2004.

Increase in Number of Eligible Shareholders of an S Corporation

The new law increases the number of shareholders in an S corporation from 75 to 100.

This is effective for taxable years beginning AFTER December 31, 2004.

Transfer of Suspended Losses Incident to Divorce

The new law provides that in the event S corporation stock is transferred to the shareholder's spouse, or to a former spouse incident to a divorce, any suspended loss or deduction with respect to that stock is treated as incurred by the S corporation with respect to the transferee in the subsequent taxable year.

This law is effective for taxable years beginning AFTER December 31, 2004.

Above-the-Line Deduction for Attorney's Fees and Costs Incurred in Certain Civil Rights Suits

The new law provides an above-the-line deduction for attorney's fees and costs paid by, or on behalf of, a taxpayer in connection with any action involving a claim of unlawful discrimination, certain claims against the federal Government, or a private cause of action under the Medicare Secondary Payer statute. The amount deductible CANNOT exceed the amount includible in the taxpayer's gross income for the taxable year on account of the judgment or settlement (whether by suit or agreement and whether as a lump sum or periodic payments) resulting from such claim.

This new law effective for fees and costs paid AFTER October 22, 2004, with respect to any judgment or settlement occurring after such date.

Consistent Amortization Period for Intangibles

The new law modifies the treatment of start-up and organizational expenditures. A taxpayer can elect to deduct up to $5,000 of start-up and $5,000 of organizational expenditures in the taxable year in which the trade or business begins. However, each $5,000 amount is reduced (but not below zero) by the amount by which the total cost of start-up or organizational expenditures is greater than $50,000, respectively. Start-up and organizational expenditures that are not deductible in the year in which the trade or business begins would be amortized over a 15-year period consistent with the amortization period for Internal Revenue Code Section 197 intangibles.

This new law is effective for start-up and organizational expenditures incurred AFTER October 22, 2004. Start-up and organizational expenditures that are incurred on or before the October 22, 2004 will continue to be eligible to be amortized over a period not to exceed 60 months. However, all start-up and organizational expenditures related to a particular trade or business, whether incurred before or after the October 22, 2004, will be considered in determining whether the cumulative cost of start-up or organizational expenditures exceeds $50,000.

Recovery Period for Depreciation of Certain Leasehold Improvements and Restaurant Property

The new law provides a statutory 15-year recovery period for qualified leasehold improvement property and qualified restaurant property placed in service before January 1, 2006. The new law also requires that qualified leasehold improvement property and qualified restaurant property be recovered using the straight-line method.

The new law defines qualified leasehold improvement property the same as under present law for purposes of the additional first-year depreciation deduction, with the following modification: if a lessor makes an improvement that qualifies as qualified leasehold improvement property, that improvement will not qualify as qualified leasehold improvement property to any subsequent owner of such improvement. The new law also provides exceptions to the subsequent owner rule in the case of death and certain transfers of property that qualify for non-recognition treatment.

The new law defines qualified restaurant property as any improvement to a building if such improvement is placed in service more than three years after the date such building was first placed in service and more than 50% of the building's square footage is devoted to the preparation of, and seating for, on-premises consumption of prepared meals.

This new law is effective for property placed in service AFTER October 22, 2004.

Exclusion of Incentive Stock Options and Employee Stock Purchase Plan Stock Options from Wages

The new law provides specific exclusions from the definitions of Social Security (FICA) and unemployment (FUTA) tax wages for remuneration on account of the transfer of stock due to to the exercise of an incentive stock option or under an employee stock purchase plan, or any disposition of such stock. Thus, under this new law, FICA and FUTA taxes will not apply upon the exercise of a statutory stock option. (This new provision also provides a similar exclusion under the Railroad Retirement Tax Act.) The new law also provides that such remuneration is not taken into account for purposes of determining Social Security benefits. In addition, federal income tax withholding will not be required on a disqualifying disposition, nor when compensation is recognized in connection with an employee stock purchase plan discount.

This new law is effective for acquired stock options exercised AFTER October 22, 2004.

Technical Explanation and Other Provisions of the Act