AJCA.

• Author: Laffie, Lesli S.
• Position: American Jobs Creation Act of 2004

In October 2004, President Bush signed into law the American Jobs Creation Act of 2004 (AJCA), which changes the taxation of foreign income and provides incentives for manufacturers. It also contains other provisions affecting individuals and businesses, particularly S corporations. Most of the AJCA takes effect in 2005 or later, but there are exceptions. Some of the provisions most important to individuals and small businesses are discussed below. (For details of the AJCA changes to extraterritorial income taxation, tax shelters, accounting methods and partnerships, see Tax Clinic, p. 6, this issue; other AJCA provisions will be covered in future issues).

Deducting sales and use taxes: For tax years 2004 and 2005, taxpayers can deduct state and local sales and use taxes in lieu of state income taxes, based on either actual taxes or IRS published tables that will be based on income, number of dependents and other factors. Sales taxes on motor vehicles and boats can be added to the IRS table amounts.

Principal residence exclusion disallowed five years after like-kind exchange: The $250,000 exclusion ($500,000 for married couples filing jointly) of gain on a sale or exchange of a personal residence will not apply if the taxpayer(s) received the residence in a like-kind exchange within five years before the sale. This new rule applies to exclusions for sales or exchanges after Oct. 22, 2004.

U.S. production activities deduction: The AJCA repeals the extraterritorial income (ETI) exclusion for transactions occurring after 2004 and replaces it with a new deduction for taxpayers with qualified production activities income (QPAI). The QPAI deduction equals the lesser of a percentage of a taxpayer's (1) QPAI for the tax year or (2) taxable income (adjusted gross income, with modifications, if an individual). While the percentage is 3% in 2(7)05 and 2006, 6% in 2007 through 2009, and 9% in 201(i) and thereafter, generally, a taxpayer cannot deduct more than 50% of the W-2 wages it paid for the year.

The law provides some transitional relief through 2006, allowing certain taxpayers to retain a portion of their old ETI benefits. The old ETI exclusion also remains in effect for certain transactions existing as of Sept. 17, 2003.

Nonqualified deferred compensation: The AJCA provides rules to discourage a plan participant's inappropriate control of or access to deferred compensation without income recognition. A participant's nonqualified deferred...