Senate Passes ETI Repeal Legislation

On October 11, 2004 the Senate passed the American Jobs Creation Act of 2004 by a vote of 69 to 17. The Act is one of the most significant pieces business and international taxation ever passed by Congress. There are a number of important provisions affecting individual taxpayers as well.

The focal point of the legislation is the repeal of the extraterritorial income (ETI) exclusion. The money raised by ETI repeal and other revenue raisers resulted in a projection that the legislation will be fully paid for. Other key funding sources come from over twenty provisions to help curtail individual and corporate tax shelters, over twenty provisions related to fuel tax evasion, provisions addressing individual and corporate expatriation, and nearly thirty other miscellaneous revenue raisers. Aside from ETI repeal, the most significant revenue is raised from a provision addressing the tax treatment of leasing transactions, a modification to the rules for charitable donations of patents, restrictions on the charitable deduction for donated vehicles, allowing private companies to collect tax debts, changes to the treatment of nonqualified deferred compensation plans, delay of the permitted amortization period for start up costs, limits on the deduction for certain entertainment expenses, and extension of customs user fees.

The most significant tax break to offset the loss of the ETI exclusion would be a new business deduction relating to income attributable to U.S. production activities. A wide range of business tax breaks are also included in the legislation, many affecting very specific industries. Among the provisions with broader impact are an extension of increased levels of small business expensing, more generous depreciation for leasehold and restaurant improvements, a package of S Corporation reform measures, and approximately 25 provisions reforming the tax treatment of international activities.

One of the more controversial provisions in the legislation is a provision to set up a fund to provide relief to tobacco farmers. Some in Congress tried unsuccessfully to allow this provision only if a provision permitting the Food and Drug Administration to regulate tobacco was also added.

Provisions related to individual taxpayers include allowing taxpayers to choose either to itemize their state income taxes or their state sales taxes, a restriction on charitable deductions for vehicle donations, allowing an above-the-line deduction for attorneys fees and court costs related to discrimination claims, and a restriction on the ability to fully expense heavy SUVs under the small business expensing provision.

Among the more than 170 provisions included in this legislation are many addressing various excise taxes and particular industries, including agriculture, energy, entertainment, real estate, and transportation.