The American Jobs Creation Act makes significant changes to how businesses are taxed. In addition, the Working Families Tax Act extends a number of expiring tax breaks for businesses of all kinds.

Starting with a new "Qualified Domestic Production Deduction" (QDPD) that, beginning in 2005, will reduce the taxable income of every U.S. "producer," including manufacturers, construction contractors, wine makers, film makers, and even some service providers, the American Jobs Creation Act makes significant changes to how businesses are taxed.

Your business will qualify for the new deduction if you "produce" anything in the U.S. Based on your revenue from U.S. production; the QDPD will be a percentage of your income (after allocating direct and indirect costs of production) from:

1) Any sale, exchange or other disposition, or any lease, rental or license, of qualifying production property produced in whole or significant part in the U.S.;
2) Any sale, exchange or other disposition, or any lease, rental or license, of qualified film produced by the taxpayer in the U.S.;
3) Any sale, exchange or other disposition of electricity, natural gas, or potable water produced in the U.S.;
4) Construction activities in the U.S.; or
5) Engineering or architectural services performed in the U.S. for construction projects located in the U.S.

In order to claim the new deduction, a business must have records to support its determination of U.S. production income. That means many businesses that have not previously maintained such records must now do so, or give up the QDPD.

In addition to the QDPD, the $100,000 annual limit (indexed for inflation and $105,000 for 2005) on a "Section 179" deduction is extended through 2007. However, the maximum Section 179 credit on an SUV placed in service after October 22, 2004, is limited to $25,000, and a new definition of SUV assures that the law will fall only on those vehicles that have been the subject of concerns about abuse.

Over 30 other tax breaks, including the research credit, direct expensing of environmental remediation costs, Work Opportunity and Welfare to Work credits, and credit for producing energy from renewable sources are extended through December 31, 2005.

And there’s more! The cost recovery period for leasehold improvements in a building that has been in service for at least three years is reduced to 15 years. The cost recovery period for "restaurant assets" - any improvement to a building for a restaurant - is also reduced to 15 years. Additional bonus depreciation will continue to be available through 2005 for non-commercial aircraft ordered and partially paid for before December 31, 2004. Property produced, leased to a user, and then sold to a third party - called "syndicated property" - is included as qualifying for bonus depreciation retroactively to September 2001.

The tax burden on U.S. taxpayers engaged in international business is reduced by:
1) Reducing limitations on the foreign tax credit and extending the carryforward period for unused credits to 10 years,
2) Allowing 100% of the foreign tax credit to offset AMT, and
3) Allowing repatriation of earnings at an extremely low tax rate for 2 years.

The permitted number of S corporation shareholders is increased from 75 to 100 and all members of a family are treated as one shareholder for the purpose of counting shareholders. Other changes to S corporation rules include provisions easing restrictions on claiming limited losses following a division of stock in a divorce, and removing a couple of technical difficulties relating to the use of S corporation shareholding trusts.

The timber industry is given significant tax relief, including capital gain treatment for the sale of timber and immediate deduction of reforestation expenses.

Alternative energy producers and consumers are favored with extension of existing credits and a new credit for users of biodiesel fuel.

Other provisions in the October 2004 tax law changes include:

1) Special 3 year income averaging is extended to fisherman, as well as farmers, and the method is allowed for AMT,
2) Maximum industrial development bond financing for small manufacturers is increased to $20 million,
3) Tax incentives are provided for small business refiners to encourage reduction of sulfur emissions,
4) The credit for producing electricity from renewable sources is expanded and allowed to offset AMT,
5) The tobacco quota program is repealed and a 10 year buyout of tobacco allotments provides transitional assistance for tobacco farmers, and
6) Relief from excise taxes or import duties is provided for a hodge-podge of items from fishing tackle boxes to nuclear reactor vessels.