American Jobs Creation Act of 2004 (P.L. 108-357) (Title VI--Fair and Equitable Tobacco Reform Act of 2004)

I. SMALL BUSINESS EXPENSING

The House bill and the Senate amendment each repeal the extraterritorial income exclusion provisions of present law, provide provisions to reduce the effective income tax imposed on income earned from certain domestic production activities, and make numerous other changes to the Internal Revenue Code. This document,² prepared by the staff of the Joint Committee on Taxation, compares certain provisions relating to tax incentives for manufacturing, small businesses, and agriculture.

In this publication set,³ (JCX-61-04 to JCX-66-04), the staff of the Joint Committee on Taxation compares provisions of H.R. 4520 as passed by the House of Representatives and as amended by the Senate relating to the repeal of the extraterritorial income exclusions, domestic production, corporate income tax rates applicable to small corporations, tax incentives for manufacturers, small businesses and farming, international tax reform and simplification for United States businesses, alcohol fuels and fuel fraud, expiring provisions, and certain revenue raising provisions.

Effective date

Date of enactment.

Effective date

Taxable years beginning after December 31, 2002.

Taxpayers are allowed an additional first-year depreciation deduction equal to either 30 percent or 50 percent of the adjusted basis of qualified leasehold improvement property placed in service before January 1, 2005. Qualified leasehold improvement property is any improvement to an interior portion of a building that is nonresidential real property, provided certain requirements are met. The improvement must be made under or pursuant to a lease either by the lessee (or sublessee), or by the lessor, of that portion of the building to be occupied exclusively by the lessee (or sublessee). The improvement must be placed in service more than three years after the date the building was first placed in service.

Qualified leasehold improvement property does not include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, any structural component benefiting a common area, or the internal structural framework of the building.

Qualified leasehold improvement property is defined 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, such improvement shall not qualify as qualified leasehold improvement property to any subsequent owner of such improvement. An exception to the rule applies in the case of death and certain transfers of property that qualify for nonrecognition treatment.

Effective date

Property placed in service after the date of enactment.

Effective Date

Property placed in service after the date of enactment.

Effective date

Property placed in service after September 10, 2001.

Effective date

Taxable years beginning after the date of enactment.

Also provides a special rule in the case of multiple units of property subject to the same lease. In such cases, property will qualify as placed in service on the date of sale if it is sold within three months after the final unit is placed in service, so long as the period between the time the first and last Same as the House bill except for effective date. units are placed in service does not exceed 12 months.

Effective date

Generally, for property acquired and placed in service after September 10, 2001. However, the special rule in the case of multiple units of property subject to the same lease applies to property sold after June 4, 2004.

Sales after the date of enactment.

Effective date

Taxable years beginning after 2004.

Effective date

Taxable years beginning after 2004.

Effective date

Date of enactment.

Effective date

Taxable years beginning after 2004.

Effective date

Taxable years beginning after 2004.

Effective date

Transfers after 2004.

Effective date

Taxable years beginning after 2004.

Effective date

Taxable years beginning after 2004.

Effective date

Taxable years beginning after 2004.

Effective date

Taxable years beginning after 2004.

Effective date

Distributions made after December 31, 2004.

Effective date

January 1, 1998.

Effective date

Taxable years beginning after 2004.

Effective date

Taxable years beginning after 2005.

Effective date

Taxable years beginning after 2003.

Effective date

Stock acquired pursuant to options exercised after the date of enactment.

Deduction applies to dividends in excess of a base-period average (repatriations over three of five most recent taxable years ending before March 31, 2003, disregarding high and low years).

Dividends and certain distributions of earnings through a chain of CFCs may qualify for the deduction. In addition to dividends, section 956 inclusions and distributions of previously taxed earnings are included in the base-period average.

Taxpayer must adopt a plan for reinvesting the dividends in the United States.

A proportional amount of foreign tax credits is disallowed; taxpayer may designate which dividends carry foreign tax credits and which dividends are deductible.

Income from nondeductible portion of dividends cannot be offset by NOLs; tax cannot be offset by credits other than foreign tax credits and AMT credits, and cannot reduce AMT otherwise owed. Deductions under sections 243 and 245 are disallowed.

Eligible dividends are limited to the greatest of: (1) $500 million; (2) amount shown on applicable financial statement as permanently invested outside the United States; and (3) in the case of an applicable financial statement showing an amount of tax attributable to earnings permanently invested outside the United States, an amount of earnings determined under Treasury regulations.

Effective date

Dividends received: (1) during the first six months of the taxpayer's first taxable year beginning on or after date of enactment; or (2) during any six-month or shorter period after date of enactment, within the taxpayer's last taxable year ending after such date, at the taxpayer's election.

Reduced rate applies to dividends in excess of a base-period average (repatriations over three of five most recent taxable years ending on or before December 31, 2002, disregarding high and low years).

Dividends and section 956 inclusions may qualify for the reduced rate and are included in the base-period average.

Taxpayer must adopt a plan for reinvesting the dividends in the United States.

A proportional amount of foreign tax credits is disallowed; taxpayer may designate which dividends carry foreign tax credits and which dividends qualify for reduce rate.

Income from nonqualifying dividends cannot be offset by expenses, losses, or other deductions.

Effective date

Dividends received during the taxpayer's first taxable year ending 120 days or more after date of enactment.

Also, for property eligible for the provision's extended replacement period, extends the deadline for making an election under section 451(e) until the period for reinvestment of such property under section 1033 expires.

Effective date

Taxable years with respect to which the due date (without regard to extensions) for the return is after December 31, 2002.

Effective date

Taxable years beginning after December 31, 2001.

Treasury regulations provide that net earnings are reduced by dividends paid on capital stock or other proprietary capital interests. The regulations have been interpreted to require that such dividends be allocated between a cooperative's patronage and nonpatronage operations, with the amount allocated to the patronage operations reducing the net earnings available for the payment of patronage dividends.

Effective date

Distributions made in taxable years ending after the date of enactment.

Section 48(b) provides a 10-percent credit on up to $10,000 of qualified amortizable basis in timber property. The amount amortized under section 194 is reduced by one half of the amount of credit claimed under section 48(b).

Repeals the reforestation tax credit.

Effective date

Expenditures paid or incurred after the date of enactment.

Disposition of timber with retained economic interest qualifies for capital gain treatment.

Effective date

Taxable years ending after date of enactment.

Allows capital gain treatment for outright sales of timber.

Effective date

Sales after 2004.

Effective date

Taxable years ending after date of enactment.

Same as the House bill except for effective date.

Effective date

Sales after date of enactment.

The property must have been held for at least four years in the business of producing timber. Certain limits on the amount of sales or the percent of aggregate adjusted basis of property sold, as well as limits on certain expenditures, also must be met.

Effective date

Sales after date of enactment.

Effective date

Taxable years beginning after date of enactment.

Taxable years beginning after date of enactment.

Taxable years beginning after date of enactment.

Taxable years beginning after December 31, 2000, except that certain "look through" rules for partnerships are effective for taxable years beginning after the date of enactment.

Taxable years beginning after December 31, 2000.

Taxable years beginning after date of enactment.

Taxable years beginning after the date of enactment.

Taxable years beginning after the date of enactment.

A RIC generally pays no income tax because it is permitted to deduct dividends paid to its shareholders in computing its taxable income. A RIC generally may pass through to its shareholders the character of its long-term capital gains.

U.S. source investment income of foreign persons

Gain or loss of a foreign person from the disposition of a U.S. real property interest (including interests in U.S. real property and U.S. real property holding companies) is subject to net basis tax as if the taxpayer were engaged in a trade or business within the United States and the gain or loss were effectively connected with such trade or business.

Estate taxation

Decedents who were U.S. citizens or residents generally are subject to Federal estate tax on all property, wherever situated. Nonresident decedents who were not U.S. citizens are subject to estate tax only on their U.S. property. Treaties may reduce U.S. taxation on transfers by estates of nonresident decedents who are not U.S. citizens.

Short-term capital gains dividends

Also provides that a RIC that earns an excess of net short-term capital gains over net long-term capital losses, which excess would not be subject to U.S. tax if earned by a foreign person, generally may, to the extent of such excess, designate a dividend it pays as derived from such excess. A foreign person who is a shareholder in the RIC generally would treat such a dividend as exempt from gross basis U.S. tax, as if the foreign person had realized the excess directly.

As under present law for distributions from REITs, also provides that any distribution by a RIC to a foreign person shall, to the extent attributable to gains from sales or exchanges by the RIC of an asset that is considered a U.S. real property interest, be treated as gain recognized by the foreign person from the sale or exchange of a U.S. real property interest. Also extends the special rules for domestically-controlled REITs to domestically-controlled RICs.

Estate tax treatment

Also provides that the estate of a foreign decedent is exempt from U.S. estate tax on a transfer of stock in the RIC in the proportion that the assets held by the RIC are debt obligations, deposits, or other property that would generally be treated as situated outside the United States if held directly by the estate.

Effective date

In general, dividends with respect to taxable years of RICs beginning after December 31, 2004. With respect to the treatment of a RIC for estate tax purposes, estates of decedents dying after December 31, 2004. With respect to the treatment of RICs under section 897 (relating to U.S. real property interests), after December 31, 2004.

Present law provides that nothing in any provision of law is to be construed as providing that an escrow account, settlement fund, or similar fund is not subject to current income tax.

To qualify, the settlement fund must be: (1) established pursuant to a consent decree entered by a judge of a Federal district court; (2) created for the receipt of settlement payments for the sole purpose of resolving claims under Comprehensive Environmental Response, Compensation and Liability Act of 1980; and (3) controlled (in terms of expenditures of contributions and earnings thereon) by the government or an agency or instrumentality thereof. Also, upon termination, any remaining funds must be disbursed to such government entity and used in accordance with applicable law.

Effective date

Taxable years beginning after December 31, 2004.

Qualifying expenses are those paid or incurred by the taxpayer after the date on which the drug is designated as a potential treatment for a rare disease or disorder by the Food and Drug Administration ("FDA").

Effective date

Expenditures paid or incurred after the date of enactment.

Imposes an excise tax of 12 percent on arrows generally.

Subjects certain broadheads (a type of arrow point) to an excise tax equal to 11 percent of the sales price instead of 12.4 percent. The present law 12.4-percent excise tax on certain arrow components (excluding broadheads) is unchanged.

Effective date

Articles sold by the manufacturer, producer, or importer after December 31, 2004.

Effective date

Articles sold by the manufacturer, producer, or importer after the date which is 30 days after the date of enactment.

Revenues from the excise tax on sport fishing equipment are deposited in the Sport Fishing Account of the Aquatic Resources Trust Fund. Monies in the fund are spent, subject to an existing permanent appropriation, to support Federal-State sport fish enhancement and safety programs.

Effective date

Articles sold by the manufacturer, producer, or importer after December 31, 2004.

Revenues from the excise tax on sport fishing equipment are deposited in the Sport Fishing Account of the Aquatic Resources Trust Fund. Monies in the fund are spent, subject to an existing permanent appropriation, to support Federal-State sport fish enhancement and safety programs.

Effective date

Articles sold by the manufacturer, producer, or importer after December 31, 2004.

The credit is calculated by multiplying the number of cases of bottled distilled spirits by the average tax-financing cost per case for the most recent calendar year ending before the beginning of the taxable year. A case is 12 80-proof 750-milliliter bottles. The average tax-financing cost per case is the amount of interest that would accrue at corporate overpayment rates during an assumed 60-day holding period on an assumed tax rate of $22.83 per case of 12 750-milliliter bottles.

The credit only applies to domestically bottled distilled spirits purchased directly from the bottler of such spirits. The credit is in addition to present-law rules allowing tax included in inventory costs to be deducted as a cost of goods sold.

The credit cannot be carried back to a taxable year beginning before January 1, 2005.

Effective date

Taxable years beginning after December 31, 2004.

All wholesale or retail dealers in liquors, wine or beer are required to keep records of their transactions. There are penalties for failing to comply with the recordkeeping requirements.

Effective date

July 1, 2004.

Effective date

SBICs formed after the date of enactment.

Effective date

Acquisitions of property made on or after the date of enactment.

A four-percent tax is imposed on the amount of a foreign corporation's U.S. gross transportation income, which includes income from the use (or hiring or leasing for use) of a vessel and income from services directly related to the use of a vessel. The tax does not apply, however, to U.S. gross transportation income that is treated as income effectively connected with the conduct of a U.S. trade or business.

The taxes imposed on income from shipping operations may be limited by an applicable U.S. income tax treaty or by an exemption of a foreign corporation's international shipping operations income in instances where a foreign country grants an equivalent exemption.

No deductions are allowed against the taxable income of an electing corporation from qualifying shipping activities, and no credit is allowed against the tax imposed under the tonnage tax regime. No deduction is allowed for any net operating loss attributable to the qualifying shipping activities of a corporation.

No gain is generally recognized upon the disposition of qualifying shipping assets, except to the extent that the amount realized upon such sale or disposition exceeds the cost of the replacement qualifying shipping assets.

Effective date

Taxable years beginning after the date of enactment.

Effective date

Contributions made after December 31, 2004.

Effective date

Bonds issued after the date of enactment.

Effective date

Expenditures incurred after the date of enactment and before the date which is 12 months after the date of enactment.

Effective date

Production periods beginning after the date of enactment.

Effective date

Distributions after date of enactment with three exceptions. Unless the taxpayer elects otherwise, the provision does not apply to distributions: (1) made pursuant to an agreement that is binding on the date of enactment and at all times thereafter; (2) described in a ruling request submitted to the IRS on or before such date; or (3) described on or before such date in a public announcement of in a filing with the SEC.

Also applies to distributions prior to the date of enactment, solely for purposes of determining whether, after such date, the taxpayer continues to satisfy the active business requirement (e.g., in the case of a restructuring).

In determining whether a cooperative qualifies as a tax-exempt farmers' cooperative, the IRS apparently has taken the position that a cooperative is not marketing certain products of members or other producers if the cooperative adds value through the use of animals (e.g., farmers sell corn to a cooperative which is fed to chickens that produce eggs sold by the cooperative).

Effective date

Taxable years beginning after the date of enactment.

Declaratory judgment procedures are not available to a cooperative with respect to an IRS determination regarding its status as a farmers' cooperative under section 521.

Effective date

Pleadings filed after the date of enactment.

Effective date

Taxable years beginning after December 31, 2003, and before January 1, 2009.

The AMT rules provide that a taxpayer's NOL deduction cannot reduce the taxpayer's alternative minimum taxable income ("AMTI") by more than 90 percent of the AMTI (determined without regard to the NOL deduction). JCWAA also provided that an NOL deduction attributable to NOL carrybacks arising in taxable years ending in 2001 and 2002, as well as NOL carryforwards to these taxable years, may offset 100 percent of a taxpayer's AMTI.

Taxpayers with taxable years ending during January are permitted to apply the provision to tax years ending during January 2004 rather than tax years ending during January 2003.

Also allows an NOL deduction attributable to NOL carrybacks arising in taxable years ending in 2003, as well as NOL carryforwards to these taxable years, to offset 100 percent of a taxpayer's AMTI.

Includes technical corrections to the NOL provisions of JCWAA.

Effective date

Net operating losses for taxable years ending after December 31, 2002.

Effective date

Taxable years beginning after December 31, 2003 and prior to January 1, 2006.

Qualified green building and sustainable design project bonds are not subject to the State tax-exempt private activity bond volume cap. Instead, Treasury may allocate authority to issue qualified green building and sustainable design project bonds up to an aggregate total of $2 billion for all projects for the period between December 31, 2004 and October 1, 2009.

Effective date

Bonds issued after December 31, 2004.

A qualified film or television production is defined as any production of a motion picture, mini-series, scripted dramatic television episode, or movie of the week, provided at least 75 percent of the total compensation expended on the production are for services performed in the United States. With respect to property that is one or more episodes in a television series, only the first 44 episodes qualify for the election.

Effective date

Qualifying productions started after the date of enactment, with a sunset for productions commencing after December 31, 2008.

The adjusted basis of property that may be taken into account under the income forecast method only includes amounts that satisfy the economic performance standard of section 461(h).

Also clarifies that the income from the property to be taken into account is the gross income from such property, not reduced by distribution costs.

Grants authority to Treasury to prescribe appropriate adjustments to the basis of property to reflect the treatment of participations and residuals under the provision.

Clarifies that, rather than accounting for participations and residuals as a cost of the property under the income forecast method of depreciation, the taxpayer may choose to deduct those payments as they are paid.

Effective date

Property placed in service after the date of enactment.

²This document may be cited as follows: Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Job Creation Tax Incentives for Manufacturing, Small Business, and Farming (JCX-62-04), September 29, 2004.

³Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Provisions Relating to the Repeal of the Exclusion for Extraterritorial Income, Domestic Production, and the Corporate Income Tax Rates Applicable to Small Corporations (JCX-61-04), September 29, 2004; Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Job Creation Tax Incentives for Manufacturing, Small Business, and Farming (JCX-62-04), September 29, 2004; Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate:Provisions Relating to International Tax Reform and Simplification for United States Businesses (JCX-63-04), September 29, 2004; Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Revenue Provisions (JCX-64-04), September 29, 2004; Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Alcohol Fuels and Fuel Fraud Provisions (JCX-65-04), September 29, 2004; and Joint Committee on Taxation, Comparison of Certain Provisions of H.R. 4520 as Passed by the House of Representatives and as Amended by the Senate: Expiring Provisions (JCX-66-04), September 29, 2004.