Jobs Creation Act Impacts CPAs

Tax planners are preparing to wrestle with the American Jobs Creation Act of 2004, a 650-page gorilla that repeals the Extraterritorial Income Exclusion regime but puts into effect a slew of changes to tax law that will require vigilance among practitioners and a ton more guidance from the Internal Revenue Service.

Specifically of interest to CPAs, some New York State Society of CPAs members said, are new deductions for domestic manufacturing activity. Definitions of manufacturing under this deduction are broad enough to potentially encompass every business from architectural and design firms to water utilities to construction contractors.

“From a practical standpoint, CPAs will have to work closely with the new law to identify which clients the benefit applies to and how to quantify what the benefits might be and whether there’s a cost benefit,” NYSSCPA Closely Held and S Corporations Committee member David Gibson said. “CPAs have to do something, because you can’t just assume that clients won’t benefit or won’t want to take advantage of it.”

President George Bush signed the Jobs Creation Act into law while on the campaign trail in October. The law phases out the ETI exclusion, ruled illegal by the World Trade Organization, which allowed the European Union to impose trade sanctions on American exports beginning last March. The implication of the law reaches beyond exporters, although the full impact won’t be clear until after the IRS issues guidance and practitioners start putting elements of the law into practice.

“When you actually sit down and put this into play, you’ll see what might be an issue, and that wasn’t addressed,” Closely Held Committee Chair Scott Cheslowitz said.

Deduction Junction, What’s Your Function?

A pivotal provision of the law gives a deduction to “domestic gross receipts” derived from “any lease, rental, license, sale, exchange or other disposition of” qualifying property “manufactured, produced, grown, or extracted” or any “film produced” or “electricity, natural gas, or potable water produced” in the United States.

The deduction also includes “construction performed in the United States” and “engineering or architectural services performed in the United States for construction projects in the United States.”

The deduction phases in over the next few years. For taxable years beginning in 2005 and 2006, the deduction is 3 percent of the lesser of the qualified production activities income for the year or the taxable income for the year. That deduction goes up to 9 percent by 2009.

The law includes exceptions for food retailing and energy transmission. The general provisions of the exemption are broad, and likely to make a CPA wonder if a client qualifies and if the deduction—with its exceptions and rules—is worth the cost of the effort. In any case, this gives cause to CPAs to begin looking into the provision now.

“If you have a client that’s going to be able to take advantage of the manufacturing deduction, there’s a lot that’s needed to be done to calculate it,” Gibson said. “If you read this stuff it’s not crystal clear exactly where the deduction actually is, so there’s going to be a lot of guidance needed. If you wait a year before you start researching, you’re out of time.”

Other Provisions

The law’s other provisions may less likely affect as broad a segment of taxpayers as the manufacturing deduction, observers said. But many could still have an impact on small businesses and individuals.

For instance, the law allows taxpayers to deduct sales tax instead of local or state taxes. This could benefit some taxpayers with high income tax who make a lot of purchases, or those who are into the alternative minimum tax. In New York state, the deduction may benefit specific people in certain occupations, such as New York state teachers who are not subject to local income tax. Gibson and Cheslowitz both say this is something that CPAs need to investigate.

The new law changes the treatment of large sport utility vehicles, ending the loophole that allowed businesses to deduct up to the full cost of any car or truck weighing more than 6,000 pounds. Now, businesses can limit their depreciation to $25,000 on trucks weighing more than 6,000 pounds but less than 14,000 pounds.

The law reforms how S corporations can work, applicable to taxable years after 2004. Among many other provisions, family members will now be able to elect to be treated as a single shareholder, and the number of shareholders in an S Corp can be as high as 100.

Guidance

Society members expect the IRS to issue guidance beginning before the end of 2004.

As more guidance becomes available, The Trusted Professional plans to revisit the Jobs Creation Act.