The AJCA's FAS No. 109 implications.

• Author: Morris, Katherine D.
• Position: American Jobs Creation Act of 2004, financial accounting statement

The American Jobs Creation Act of 2004 (AJCA), signed into law by President Bush on Oct. 22, 2004, attempted to balance tax breaks for domestic manufacturers and tax relief for multinational corporations and intended to provide U.S. manufacturing companies with an economic edge for competing in the global economy. The AJCA's financial reporting considerations began to materialize when accounting for income taxes in first-quarter 2005 financial statements. As a result, the Financial Accounting Standards Board (FASB) finalized two staff positions (FSPs) to provide guidance to companies and their auditors on how to handle post-AJCA income taxes under Financial Accounting Statement (FAS) No. 109, Accounting for Income Taxes.

FSP FAS 109-1

The AJCA's qualified production activities deduction (Sec. 199) is the lesser of 3% (increasing to 9% in 2010) of either a taxpayer's "qualified production activities" income or taxable income, determined without regard to this deduction. Importantly, however, no deduction is available if a taxpayer has a net operating loss (NOL) for the current tax year, or NOL carryovers that eliminate taxable income for the current year.

Companies had to consider the AJCA's changes to accounting for income taxes and apply FSP FAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, to the first quarter of 2005. According to FSP FAS 109-1, after the AJCA, companies should account for the tax deduction on qualified production activities as a special deduction--a permanent difference--rather than as a rate reduction. Companies may have to consider the deduction's effect on their effective tax rate in determining the estimated annual rate used for interim financial reporting.

Any benefit from the deduction has to be reported during the year in which the deduction is claimed. Separate disclosure in the effective tax rate reconciliation may be warranted. Due to the need for interpretation, some companies may have to record an accrual for a potential disallowance of the deduction. Further, state guidance on deductibility for state business taxes is still unavailable in many jurisdictions.

FSP FAS 109-2

The AJCA provides a special onetime, 85% tax deduction of certain foreign earnings repatriated to a U.S. taxpayer under Sec. 965, provided certain criteria are met, including:

* Investing dividends in the...