AMERICAN JOBS CREATION ACT OF 2004

H.R. 4520, the American Jobs Creation Act of 2004, passed the House of Representatives on October 7, 2004, and the Senate on October 11, 2004. The President signed the bill October 22, 2004, and it becomes effective immediately.

The Act extends fifty percent (50%) bonus depreciation for non-commercial aircraft for an additional year and limits deductions for aircraft expenses when there is personal use of the aircraft to the amount that is included in the wages of the employee. This will affect how companies treat costs of business aircraft flown for personal use. Companies may want to review their personal use policies and procedures. The legislation is summarized below, followed by the relevant text of the new bill.

BONUS DEPRECIATION EXTENDED

SEC. 336. MODIFICATION OF DEPRECIATION ALLOWANCE FOR AIRCRAFT

Bonus Depreciation is extended until January 1, 2006 for certain aircraft. The requirements to take advantage of bonus depreciation in 2005 are:

· That it be "qualified property":

· Eligible for MACRS depreciation

· Recovery period of 20 years or less

· Original use begins with taxpayer after September 10, 2001

· Acquired after September 11, 2001, and no written binding contract for the acquisition in effect before September 11, 2001

· Acquired pursuant to a written binding contract which was entered into after September 10, 2001, and before January 1, 2005

· Not transportation property (defined as tangible personal property used in the trade or business of transporting persons or property)

· Purchaser has made at the time of contract for purchase a nonrefundable deposit for the lesser of (i) 10 percent of the cost or (ii) $100,000

· Estimated production period exceeding 4 months

· Cost exceeding $200,000

PERSONAL USE OF BUSINESS AIRCRAFT

SEC. 907. LIMITATION OF EMPLOYER DEDUCTION FOR CERTAIN ENTERTAINMENT EXPENSES

The legislation also limits deductions for aircraft expenses when there is personal use of the aircraft by a “specified individual” (generally, an officer, director, or 10%-or-more owner) to the amount that is included in the wages of the employee. (Under the IRS Standard Industry Fare Level (SIFL) fringe benefit valuation method, the amount included in the employees income is usually much less than the actual cost of a personal flight.) An earlier version of the legislation applied only to public companies; the final version, however, applies this limitation to all companies. This legislation effectively "overrules" the holding in Sutherland Lumber-Southwest Inc. v. Comm., 255 F.3d 495, 07/03/2001, which allowed the full amount of deductions for operating personal flights as long as the appropriate amount (SIFL) was included in the employees income.

Below is the text of the American Jobs Creation Act of 2004 (Enrolled as Agreed to or Passed by Both House and Senate):

SEC. 336. MODIFICATION OF DEPRECIATION ALLOWANCE FOR AIRCRAFT.

(a) AIRCRAFT TREATED AS QUALIFIED PROPERTY-

(1) IN GENERAL- Paragraph (2) of section 168(k) is amended by redesignating subparagraphs (C) through (F) as subparagraphs (D) through (G), respectively, and by inserting after subparagraph (B) the following new subparagraph:

`(C) CERTAIN AIRCRAFT- The term `qualified property' includes property--

`(i) which meets the requirements of clauses (ii) and (iii) of subparagraph (A),

`(ii) which is an aircraft which is not a transportation property (as defined in subparagraph (B)(iii)) other than for agricultural or firefighting purposes,

`(iii) which is purchased and on which such purchaser, at the time of the contract for purchase, has made a nonrefundable deposit of the lesser of--

`(I) 10 percent of the cost, or

`(II) $100,000, and

`(iv) which has--

`(I) an estimated production period exceeding 4 months, and

`(II) a cost exceeding $200,000.'.

(2) PLACED IN SERVICE DATE- Clause (iv) of section 168(k)(2)(A) is amended by striking `subparagraph (B)' and inserting `subparagraphs (B) and (C)'.

(b) CONFORMING AMENDMENTS-

(1) Section 168(k)(2)(B) is amended by adding at the end the following new clause:

`(iv) APPLICATION OF SUBPARAGRAPH- This subparagraph shall not apply to any property which is described in subparagraph (C).'.

(2) Section 168(k)(4)(A)(ii) is amended by striking `paragraph (2)(C)' and inserting `paragraph (2)(D)'.

(3) Section 168(k)(4)(B)(iii) is amended by inserting `and paragraph (2)(C)' after `of this paragraph)'.

(4) Section 168(k)(4)(C) is amended by striking `subparagraphs (B) and (D)' and inserting `subparagraphs (B), (C), and (E)'.

(5) Section 168(k)(4)(D) is amended by striking `Paragraph (2)(E)' and inserting `Paragraph (2)(F)'.

(c) EFFECTIVE DATE- The amendments made by this section shall take effect as if included in the amendments made by section 101 of the Job Creation and Worker Assistance Act of 2002.

SEC. 907. LIMITATION OF EMPLOYER DEDUCTION FOR CERTAIN ENTERTAINMENT EXPENSES.

(a) IN GENERAL- Paragraph (2) of section 274(e) (relating to expenses treated as compensation) is amended to read as follows:

`(2) EXPENSES TREATED AS COMPENSATION-

`(A) IN GENERAL- Except as provided in subparagraph (B), expenses for goods, services, and facilities, to the extent that the expenses are treated by the taxpayer, with respect to the recipient of the entertainment, amusement, or recreation, as compensation to an employee on the taxpayer's return of tax under this chapter and as wages to such employee for purposes of chapter 24 (relating to withholding of income tax at source on wages).

`(B) SPECIFIED INDIVIDUALS-

`(i) IN GENERAL- In the case of a recipient who is a specified individual, subparagraph (A) and paragraph (9) shall each be applied by substituting `to the extent that the expenses do not exceed the amount of the expenses which' for `to the extent that the expenses'.

`(ii) SPECIFIED INDIVIDUAL- For purposes of clause (i), the term `specified individual' means any individual who--

`(I) is subject to the requirements of section 16(a) of the Securities Exchange Act of 1934 with respect to the taxpayer, or

`(II) would be subject to such requirements if the taxpayer were an issuer of equity securities referred to in such section.'.

(b) EFFECTIVE DATE- The amendment made by this section shall apply to expenses incurred after the date of the enactment of this Act.