American Jobs Creation Act of 2004

Our firm is not engaged by this text in the rendering of legal, tax, accounting, or similar professional services.  While the legal, tax, and accounting issues discussed in this material have been reviewed with sources believed to be reliable, concepts discussed can be affected by changes in the law or in the interpretation of such laws since this text was printed.  For that reason, the accuracy and completeness of this information and the opinions based thereon cannot be guaranteed.  Before taking any action, all references and citations should be checked and updated accordingly.

This section briefly summarizes portions of the “American Jobs Creation Act of 2004,” enacted on October 11, 2004 . .  The following are highlights of portions of the new law affecting individuals and small businesses:

·        small business “expensing” allowance;

·        S corporation rules liberalized;

·        local sales taxes deduction (effective for 2004 and 2005).

·        limits the “expensing” allowance for sport utility vehicles to $25,000;

·        starting January 1, 2005 , imposes tighter rules on taxpayers who want to claim a deduction of more than $500 for motor vehicles, boats, or airplanes donated to charity;

·        imposes tighter rules for documenting charitable contributions of property made after June 3, 2004 ;

·        toughens the rules for “nonqualified” deferred compensation plans

Small Business “Expensing” Increases Extended
Previous legislation increased the annual allowance for taxable years beginning after 2002 and before 2006 to $100,000 (from $25,000) and the “phaseout” threshold to $400,000 (from $200,000), with annual inflation adjustments, and added off-the-shelf software as eligible property. For taxable years beginning after 2005, the dollar amount was scheduled to revert back to $25,000. The new law extends the increased annual allowance through taxable years beginning before 2008.  

S Corporation Rules Liberalized
Several new rules make it easier to qualify as an S corporation or to retain that status. 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;

·         provides relief from inadvertently invalid qualified subchapter S subsidiary (“QSST”) elections;

Itemized Deduction for State and Local Sales Taxes
Individuals who itemize their deductions can now elect to deduct state and local sales taxes instead of state and local income taxes. Although the principal beneficiaries are residents of states that do not have an income tax, the new deduction provides an alternative for taxpayers living in states that impose both income and sales taxes. The amount of the deduction can be based on actual taxes paid or by using IRS-prepared tables.

This provision is retroactive to January 1, 2004 . Therefore, the deduction will be available for individual returns due next April, and the IRS may have to scramble to incorporate this change. Taxpayers and return preparers should be alert for last-minute changes or corrections as the 2004 filing season approaches.  

SUV Expensing Allowance Limited to $25,000
Previously, SUVs weighing more than 6,000 pounds were not subject to the limitations imposed on so-called “luxury” automobiles because their weight put them outside the limitation-triggering definition of “passenger” automobiles. 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. This limit will be effective for property placed in service on the date the President signs the legislation.  

Charitable Deduction Rules Tightened
Obtaining a deduction for the charitable contribution of your car, or a boat or airplane, will be more difficult after December 31, 2004 .  After that date, you may no longer use the “Blue Book” value because your deduction is limited to the amount for which the charity later sells the vehicle.  In addition to this limitation on the amount of your deduction, the charity must prepare, and you must attach to your return, a statement identifying the vehicle and stating the amount for which it was sold.  Failure to attach the statement will result in disallowance of your deduction.

The legislation also includes new limitations on charitable donations of intellectual property, i.e., patents, copyrights and similar property, made after June 3, 2004 .  Rather than deducting the value of the intellectual property in the year of the contribution, you are now allowed to deduct only its cost, reduced by any amortization or depreciation deductions that you have taken.  Then, over the next 10 years, you will be allowed to deduct a portion of any net income that the charity receives from its exploitation of the property, but only after offsetting the amount of the initial deduction.

Finally, the new law strengthens the requirements for substantiating contributions of property (excluding contributions of cash or publicly traded stock) made after June 3, 2004 . The new law codifies existing IRS rules that require that: (1) certain information be provided on the return if the deduction exceeds $500; and (2) the taxpayer obtain a qualified appraisal for property with a value exceeding $5,000.  There is also a new requirement that the appraisal be attached to the tax return when the deduction exceeds $500,000. 

 Nonqualified Deferred Compensation Rules Toughened
The new law significantly changes the law of nonqualified deferred compensation and imposes potentially large tax penalties for noncompliance. Unless a nonqualified deferred compensation (NQDC) plan meets the requirements of a new tax Code section, amounts deferred under the plan are includible in income back to the time of deferral or, if later, when no longer subject to a substantial risk of forfeiture, and are subject to interest at the underpayment rate plus 1% and a 20% additional tax.

The new law imposes requirements on NQDC plans with regard to participant elections, distributions, acceleration and funding that likely will necessitate amendments to most NQDC plans. A participant must make an election to defer compensation by the end of the taxable year preceding the year in which the employee will perform services for the company. Employees who are newly eligible must elect to defer within 30 days of becoming eligible. For performance-based compensation for services provided over a period of at least 12 months, the election must be made no later than six months before the end of the service period. The plan or the election must include the timing and form of a distribution.

Except as provided by regulations yet to be issued, distributions are permitted only upon the following triggers: (1) separation from service; (2) death of the participant; (3) a specified time or pursuant to a fixed schedule (but not upon a specified event); (4) change in control of the corporation; (5) an unforeseeable emergency; or (6) disability of the participant. Also except as provided by regulations, a plan may not accelerate a distribution. This provision negates such commonly used approaches as “haircuts,” which  permit a participant to take a distribution at any time, but the participant must forfeit a portion of his or her account balance over the amount of the distribution.

The new law provisions apply to amounts deferred after December 31, 2004 . Earnings on amounts deferred prior to that date generally are not subject to the new requirements. However, if a plan is “materially modified” after October 3, 2004 , amounts deferred to a plan generally will be subject to the new law. The new law directs the Treasury to issue guidance within 60 days of the date of enactment that would provide for a limited period of time during which elections as to deferrals made after December 31, 2004 , could be cancelled and plans could be amended to conform to the new requirements.