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

I. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME (sec. 101 of the House bill and sec. 101 of the Senate amendment)

II. DOMESTIC PRODUCTION PROVISIONS (sec. 102 of the House bill and secs. 102 and 103(a) of the Senate amendment)

III. RATE REDUCTION FOR SMALL CORPORATIONS (sec. 103 of the House bill)

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 those provisions relating to the repeal of the extraterritorial income exclusion, domestic production, and the provisions relating to the corporate income tax rates applicable to small corporations.

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.

Foreign trading gross receipts are eligible for the exclusion to the extent that they are qualifying foreign trade income. Qualifying foreign trade income is the amount of gross income that, if excluded, would result in a reduction of taxable income by the greatest of:

Specifically, the gross receipts must be:

Qualifying foreign trade property generally is property manufactured, produced, grown, or extracted within or outside the United States that is held primarily for sale, lease, or rental in the ordinary course of a trade or business for direct use, consumption, or disposition outside the United States. No more than 50 percent of the fair market value of such property can be attributable to the sum of: (1) the fair market value of articles manufactured outside the United States, and (2) the direct costs of labor performed outside the United States. With respect to property that is manufactured outside the United States, certain rules are provided to ensure consistent U.S. tax treatment with respect to manufacturers.

However, the ETI regime remains in effect for transactions in the ordinary course of a trade or business if such transactions are pursuant to a binding contract (including a purchase option, renewal option, or replacement option that is included in such contract) between the taxpayer and an unrelated person and such contract is in effect on January 14, 2002, and at all times thereafter.

For transactions prior to 2005, taxpayers retain 100 percent of their ETI benefits. For transactions after 2004, provides taxpayers with 80 percent of their otherwise-applicable ETI benefits with respect to transactions during 2005, and 60 percent of their otherwise-applicable ETI benefits with respect to transactions during 2006. However, such ETI benefits for 2005 and 2006 do not include benefits from binding contracts for which the ETI regime remains in effect.

Effective date

The provision is effective for transactions after December 31, 2004.

However, the ETI regime remains in effect for transactions in the ordinary course of a trade or business if such transactions are pursuant to a binding contract between the taxpayer and an unrelated person and such contract is in effect on September 17, 2003, and at all times thereafter.

Provides corporations and cooperatives that currently benefit from the ETI regime a transition benefit for taxable years ending after the date of enactment and beginning before January 1, 2007, if the corporation entered into one or more transactions in the taxable year beginning in 2002 for which FSC/ETI benefits were allowable. Generally, a corporation's transition benefit is equal to the applicable percentage (i.e., 80 percent in post-enactment 2004 and 2005 and 60 percent in 2006) of the average FSC/ETI benefit for the corporation's taxable years beginning in calendar years 2000, 2001, and 2002. A corporation must have entered into one or more transactions during its taxable year beginning in the 2002 calendar year with respect to which FSC/ETI benefits were allowable to receive this benefit.

Generally, a corporation's FSC/ETI benefit is comprised of the amounts excludable from the gross income of the corporation under the ETI regime and the exempt foreign trade income of related FSCs from property acquired by the FSCs from the corporation. However, this aggregate amount does not include any amount attributable to a transaction involving a lease by the corporation unless the corporation manufactured or produced (in whole or in part) the leased property.

However, the transition benefit is generally reduced for a taxable year by the specified percentage of exempted FSC income and excluded ETI of the corporation for the taxable year from transactions pursuant to a binding contract.

Effective date

The provision is effective for transactions after date of enactment.

 Taxable income           Rate

There is no provision in the Code that permits taxpayers to claim a deduction from taxable income attributable to domestic production activities, other than generally allowable deductions of costs incurred to produce such income.

The reduced maximum corporate tax rate under the provision is 32 percent (34 percent for taxable years beginning before 2007).

Provides that a corporation may revoke a previous election to treat the cutting of timber as a sale or exchange.

Effective date

Taxable years beginning after December 31, 2004.

Does not apply to: (1) consumable property used by the taxpayer in the provision of services; (2) oil or gas (other than primary products thereof); (3) utility services (including electricity and water); or (4) certain topical or transitory media products.

Applies to individuals, corporations, cooperatives, and pass-through entities such as S corporations, partnerships, and estates and trusts. However, the amount of the deduction is limited to 50 percent of the W-2 wages paid by the taxpayer during the taxable year.

With regard to taxable income attributable to films and videotape, the deduction is determined separately (except for the wage limitation) for theatrical films, broadcast television, and home video.

Applies to production activities in the United States or any possession of the United States.

For taxable years beginning after 2008, the amount of the deduction is 9 percent. For taxable years beginning in 2004, 2005, 2006, 2007, and 2008, the amount of the deduction is 5, 5, 5, 6, and 7 percent, respectively.

For taxable years beginning before 2013, the amount of the deduction is reduced by the ratio of domestic production activities to worldwide production activities of the taxpayer. For taxable years beginning in 2010, 2011, and 2012, the amount of the reduction is itself reduced by 25, 50, and 75 percent, respectively.

Effective date

Taxable years ending after the date of enactment.

 Taxable income           Rate

Year 2013 and thereafter:

 Taxable income           Rate

Years 2011 and 2012:

 Taxable income              Rate

Years 2008, 2009, and 2010:

 Taxable income              Rate

Years 2005, 2006, and 2007:

 Taxable income              Rate

Effective date

Taxable years beginning after 2004.

² This 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: 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.

³ 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 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.