Tax Flash
The American Jobs Creation Act of 2004
On October 22, 2004, President Bush signed
into law The American Jobs Creation Act of
2004 ("The Act). The law contains revenue-
raising provisions and tax cuts that impact both
individual and business taxpayers. The
following is a summary of some of the changes:
CORPORATE TAX CHANGES
Extraterritorial Income (ETI)
The Extraterritorial Income exclusion has been
repealed. However there is a phase out period
in which corporations retain 100% of their ETI
benefits in 2004, 80% of their benefits in 2005
and 60% in 2006. The repeal does not apply to
a transaction in the ordinary course of trade or
business under binding contract between
unrelated persons that was in effect on
September 17, 2003.
Deduction related to U.S. Manufacturing
Activities
In the place of the ETI deduction, a new
deduction related to domestic production will
be phased-in over the next 5 years. The
maximum deduction, which will be available in
2010, is equal to nine percent of the lesser of an
eligible taxpayer's taxable income or qualified
production activities income.
New Tax Depreciation and
Amortization Rules
Sec. 179 Expensing Limits
The temporary increase in expensing limits for
qualified depreciable property and computer
software that was to expire after 2005 has been
extended through 2007.
Film and Entertainment Property
Certain qualified film and television production
costs can now be deducted, rather than
capitalized. Those film and entertainment
companies electing to use the income forecast
method of depreciation for films, recordings,
books and similar property, qualified
participations and residuals may be included in
adjusted basis when the property is placed in
service.
Other Business Deductions and Credits
Start-up Expenses
Start-up expenditures of up to $5,000 US are
deductible in the year a new trade or business
begins. Additional start-up costs are to be
amortized over 180 months.
Entertainment Expenses
Corporate entertainment expenses for items
provided to certain officers, directors and
shareholders are limited to the amount that is
includible in the recipient's gross income.
Other Corporate Tax Changes
Allocation of Global Interest Expense Between
Members of an Affiliated Group
Beginning in 2009 an affiliated group of
corporations may make a one-time election to
determine foreign-source taxable income of the
group by allocating and apportioning interest
expense of the domestic members of a
worldwide affiliated group on a worldwide-
group basis, as if all members of the worldwide
group were a single corporation.
SPECIAL REPORT
FALL 2004
Related Foreign Entities
New rules have been established to prevent the
mismatching of interest and original issue
discount deductions and income inclusions in
transactions between U.S. taxpayers and
related foreign entities.
Holding Company Liquidations
A distribution to a foreign corporation in
complete liquidation of an applicable holding
company is treated as a taxable dividend.
Type "D" Reorganizations
New laws have been established to limit the
use of type "D" reorganizations to avoid gain
when a controlled corporation assumes
liabilities of the transferor corporation that
exceed the basis of the transferred assets.
Brother-Sister Controlled Group
The definition of a brother-sister controlled
group is modified for purposes of the corporate
income tax brackets, the alternative minimum
tax exemption and the accumulated earnings
credit.
PERSONAL TAX CHANGES
Sales Taxes
For 2004 and 2005, taxpayers who itemize
deductions now have the choice to deduct
either their state and local income taxes or their
state and local sales taxes. This new tax law
allows individuals living in a state where income
tax is not imposed to elect to deduct state and
local sales taxes paid.
1
 Principal Residence
A principal residence acquired in certain
non-taxable exchange must be held for at
least five years in order for to qualify for the
principal residence exemption, which allows
for any gain recognized on its sale to be
excludable.
Foreign Tax Credit Carryover/Carryback
1. The distribution is received with respect
to a class of stock that is regularly
traded on an established market
located in the U.S.; and
2. The foreign investor does not own more
than 5% of the class stock at any time
during the tax year in which the
distribution is received.

The new tax law extends the foreign tax The distribution is to be treated as a
credit carryover period from 5 years to 10 dividend, and taxed as such, to the foreign
years, and decreases the carryback period investor.
from 2 years to 1 year.
Exclusion of Income Derived from Wagers
Translation of Foreign Taxes Placed on Certain Dog and Horse Races by
Nonresidents
Currently a taxpayer is required to translate
foreign taxes paid into U.S. dollars to be An exemption is provided for nonresident
reported on their U.S. tax return using an alien's income derived from certain legal
average annual exchange rate. The new tax wager transactions initiated outside the U.S.
Collins Barrow Office Locations:
law allows for the taxpayer to elect to use the with respect to a live horse or dog race
Banff Hearst Sarnia exchange rate at the time the taxes are paid. taking place in the U.S. As a result, no
withholding will be required and no tax due
Bobcaygeon Kapuskasing Sebringville
Alternative Minimum Tax ("AMT") Treatment on any winnings resulting from such a
Calgary Kingston Sturgeon Falls transaction.
Cambridge Leamington Sudbury Under the current law, the AMT foreign tax
credit is generally limited to 90% of the Noncash Contributions
Canmore Lindsay Toronto
taxpayer's AMT. The new law, which is
Carleton Place London Vancouver effective for tax years beginning after Charitable contributions of property made
Chatham Manotick Vaughan December 31, 2004, eliminates the 90% after June 3, 2004 and valued at more than
limitation. $500 are not deductible unless the donor
Chelmsford Montreal Wallaceburg
meets specific appraisal and documentation
Drayton Valley North Bay Waterloo Expatriation Rules requirements.
Edmonton Orangeville Winchester
New expatriation standards have been Foreign Accounts
Elora Ottawa Windsor
established under The American Jobs
Exeter Peterborough Winnipeg Creation Act of 2004 to provide an objective The new tax law has heightened the civil
Fenelon Falls Red Deer method to determine whether former citizens penalty on those who fail to report their
or long-term residents expatriated in order to foreign financial accounts to $10,000. If their
Contact Information:
avoid U.S. taxation. However should the behavior is intentional and willful, the penalty
expatriated individual return to the U.S. for jumps to $100,000 or 50% of the transaction
Internet: www.collinsbarrow.com more than 30 days, they will be treated as or account.
Email: info@collinsbarrow.com citizens for federal tax purposes and be
taxed on their worldwide income. This article briefly summarizes some, but not
Careers: careers@collinsbarrow.com
all, of the U.S. tax law changes made by the
Certain Distributions from a U.S. Real Estate American Job Creation Act of 2004. Please
Collins Barrow publishes Tax Flash for its clients and Investment Trust ("REIT") to Nonresidents contact your Collins Barrow Tax Advisor for
associates. It is designed to highlight and summarize the more information about any of the above new
continually changing tax and business scene across
Under the new law, a capital gain distribution tax laws or any other related U.S. tax
Canada and around the world. While Tax Flash suggests
general planning ideas, we recommend professional
from a REIT is removed from treatment as inquiries.
advice always be sought before taking specific planning effectively connected U.S. income for a
steps. foreign investor provided that: