American Jobs Creation Act of 2004 (HR4520)
Cancellation of Indebtedness Income on Transfer of Partnership Interest-- In determining cancellation of indebtedness income, a partnership that transfers a partnership interest to a creditor in satisfaction of a debt is treated as if it paid cash equal to the fair market value of the partnership interest, effective for cancellations of indebtedness occurring on or after the date of enactment.
American Jobs Creation Act of 2004 (HR4520)
Number of Shareholders-- For purposes of the 75 shareholder limitation, all family members (up to six generations) may elect to be treated as one shareholder. In addition, the maximum number of eligible shareholders is increased from 75 to 100, effective for taxable years beginning after December 31, 2004. Transfer of Suspended Losses Incident to Divorce. Losses that are suspended because of basis and at risk limitations are transferred to the spouse who receives the stock as part of a divorce settlement, effective for taxable years beginning after December 31, 2004.
Farmers and Fishermen Income Averaging and AMT-- Beginning in 2004, fishermen may use the income averaging previously available only to farmers. In addition, income averaging and AMT are coordinated so the benefits of income averaging are not reduced or eliminated by AMT. For purposes of determining AMT, the taxpayer's regular tax liability (without averaging) is compared to the tentative minimum tax, effective for taxable years beginning after December 31, 2003.
Reforestation Expenses-- Taxpayers may now elect to deduct up to $10,000 ($5,000 MFS) of reforestation expenses in the year paid or incurred (instead of amortizing the expenses over 84 months).Trusts and estates must apportion the allowed deduction between the fiduciary and beneficiar(ies) based on forthcoming Treasury regulations.
Note: The reforestation tax credit is repealed for expenses paid or incurred after the date of enactment.
Tobacco Buyout-- The current federal tobacco support program is repealed. Tobacco quota holders will receive $7 per pound on their basic quota allotment paid in equal installments over 10 years, beginning in 2005. Tobacco producers will receive transition payments of $3 per pound based on their effective quota, paid in equal installments over 10 years, beginning in 2005. If a farmer or producer dies prior to receiving all payments, the right to the payments transfers to the surviving spouse, if none, to the estate of the farmer or producer.
Foreign Tax Credit Baskets-- Beginning in 2007, the foreign tax credit limitation categories of income are reduced from nine to two - passive income and general category income. Note: Taxes paid or accrued in a tax year beginning before 2007 and carried to 2007 or later years are treated as if the new rule applied when the taxes were paid or accrued.
Foreign Tax Credit Carryforward/ Carryback-- The foreign tax credit carryforward period is extended to 10 years (from five) and the carryback period is reduced to one year (rather than two). The extension of the carryforward period is effective for excess credits that are carried to a tax year ending after the date of enactment. The one year carryback period is effective for excess credits arising in tax years beginning after the date of enactment.
Foreign Tax Credit and AMT-- The current 90% limitation on the use of foreign tax credits against corporate AMT is repealed beginning in 2005.
U.S. Possessions - Residence Rules-- A two-part test applies for purposes of determining who is a resident of certain U.S. possessions (i.e., Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, or the Virgin Islands).
This change is effective for tax years ending after the date of enactment.
First-year Depreciation for 2003 and 2004
Increased Section 179 Expense Amount for 2003-2005
Under prior law, up to $25,000 of certain assets placed in service may be expensed under Code section 179. This amount was phased out if more than $200,000 of qualifying property is placed in service in one year. The election was generally required to be made on the original return and could be revoked only with consent of the Commissioner.
Under the new law, up to $100,000 (2003) may be expensed. This amount is phased out if more than $400,000 of qualified property is placed in service in one year. Both amounts are indexed for inflation. The new law also allows the election to be made on an original or amended return and can be revoked without permission.
Example: Assume Sam Smith's net income from self-employment (Schedule C) is $75,000, after claiming a section 179 expense deduction of $25,000 (on $50,000 of qualified purchases). Assuming Sam's income is taxed at 30% (based on total taxable income), Sam pays income tax of $22,500 on his Schedule C income. Self-employment tax of $10,597 is also paid.
Disregarding the change in depreciation, Sam could reduce his Schedule C income to $50,000. His income tax bill would decrease to $15,000, and his SE tax would be reduced to $7,065. Sam's total tax savings due to the increased section 179 expense election would be $10,502 ($7,500 - ($1,767 x 30% reduced SE tax adjustment) + $3,532).