New 10/15/04
Congress passed the American Jobs Creation Act of 2004 on October 11, 2004, containing mainly business-orientated tax breaks, but also important tax incentives and changes for individuals.
Businesses
Repeal of the FSC/ETI rules
Several years ago, the World Trade Organization ruled our foreign sales corporation/extraterritorial income regime (FSC/ETI) was an illegal trade subsidy, and the European Union started penalizing our exports, with penalties growing every month. The new law repeals the FSC/ETI rules.
Manufacture deduction
Congress created a new deduction for “manufacturers” that effectively reduces the overall corporate tax rate. Congress defined “manufacturer” very broadly, and businesses qualifying for the new deduction include traditional manufacturers, construction firms. engineering and architectural firms, film and video, computer software, agricultural processors, and many service providers. The deduction starts at 3% and grows to 9% by 2010. The new manufacturing deduction helps businesses losing the FSC/ETI tax break
International taxes
The new law also simplifies some complex international tax rules. Congress also created some temporary incentives for multi-nationals to bring their earnings back to the U.S. under temporary, more generous tax treatment. The 9 foreign tax credit baskets are reduced to 2 and foreign credit carryover/carryback rules are enhanced. Congress eliminated the 90 percent limitation rule for the AMT foreign tax credit. The foreign personal holding company and foreign personal investment company rules are repealed. There are new taxpayer-friendly rules for RICs and REITs, more generous exchange rate provisions, and reduction in secondary withholding rates.
Enhanced expensing
The new law extends the $100,000 limit for 2 more years.
S corporation reform
S corporations can have 100 shareholders (increased from 75). One family can also elect to be treated as a single shareholder. Traditional and Roth IRAs can hold shares in a bank that is an S corp, and inadvertent subchapter S subsidiary elections can be corrected. Congress also approved easing the rules for the transfer of suspended losses to a spouse incident to divorce and determining potential current beneficiaries of an electing small business trust.
Individuals
State sales taxes
Taxpayers can deduct either their state income taxes or their state sales taxes. If you pay both, probably your state income taxes will be higher but if you’ve made a couple of expensive purchases this year, your sales taxes may be higher.
Charitable donations
The new law cracks down on charitable donations, especially car and truck donations. Starting 2005, your deduction will be limited to the price the charity gets for selling it, and the charity will also have to tell the IRS how much your vehicle sold for.
SUVs
The prior vehicle caps on depreciation did not apply to cars or trucks weighing more than 6,000 pounds, businesses could deduct up to the fill cost of a large SUV. Effective immediately, vehicles over 6,000 pounds, but not more than 14,000 pounds, are limited by a $25,000 cap. In comparison, the first year deduction amounts for vehicles under 6,000 pounds are capped at $2,960 this year ($10,610 with bonus depreciation).
Deferred compensation plans
Generally, amounts deferred under a nonqualified deferred compensation plan will be subject to immediate taxation if certain requirements are not met. Other provisions affect the timing of important elections. Offshore assets will no longer be considered deferred compensation.
Penalties
Individuals and businesses investing in tax shelters and other abusive transactions will be liable for much higher penalties. Companies that promote these transactions also will be hit with very high penalties. Now may be the time to voluntarily disclose that transaction to the IRS as Congress gave the IRS discretion to waive the harsh penalties and the agency may do so for taxpayers who cooperate. Individuals and businesses that file bogus or frivolous returns will also be slapped with higher penalties. Return preparers who help file these frivolous returns also will be liable for monetary sanctions.
Installment agreements and debt collection
The new law directs the IRS to enter into partial installment agreements, generally subject to review at least once every 2 years. Congress also authorized private collection of federal tax debts. Private debt collectors will be able to offer taxpayers short-term installment agreements.