President Bush on Friday quietly signed the American Jobs Creation Act of 2004 into law, while flying on Air Force One to a campaign appearance in Pennsylvania.

The AJCA started out as a bill to deal with an adverse World Trade Organization ruling that the extraterritorial income exclusion constituted a prohibited export subsidy, and morphed into major tax legislation. It makes some important changes, including those affecting businesses, especially manufacturers and those with foreign income.

Notable changes include the liberalization of the S corporation rules, new requirements for nonqualified deferred compensation plans and a deduction for sales taxes. There are also provisions favoring specific industries, as well as a number of revenue raisers.

Here's a summary of some of the act's major provisions.Extraterritorial income exclusion phaseout. The ETI exclusion is repealed over a number of years subject to a transition rule. Taxpayers are allowed 80 percent of ETI benefits in 2005 and 60 percent during 2006. However, the ETI exclusion provisions remain in effect for transactions in the ordinary course of a trade or business if they are pursuant to a binding contract with an unrelated person, and the contract is in effect on Sept. 17, 2003, and at all times thereafter.New deduction for manufacturers. Effective for taxable years beginning after Dec. 31, 2004, an escalating deduction is allowable from taxable income (or adjusted gross income for an individual) for a portion of qualified production activities income. For taxable years beginning in 2005 and 2006, the deduction, subject to a limitation, is 3 percent of income of the lesser of (1) the qualified production activities income for the taxable year, or (2) taxable income (determined without regard to this provision) for the taxable year. For taxable years beginning in 2007, 2008 and 2009, the percentage is 6 percent. For taxable years beginning after 2009, it's 9 percent. The deduction for a taxable year is limited to 50 percent of the wages paid by the taxpayer during the calendar year that ends in such taxable year. The deduction is also allowed for purposes of computing alternative minimum tax income.In-lieu of sales tax deduction. Via an election, an itemized deduction may be taken for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes. The deduction is only available for taxable years beginning after Dec. 31, 2003, and prior to Jan. 1, 2006. Taxpayers are able to deduct the actual amount of general state and local sales taxes paid by accumulating receipts, or they may use Internal Revenue Service tables. Certain taxes paid on the purchase of motor vehicles, boats and other items can also be deducted when the tables are used.Nonqualified deferred compensation plans overhaul. There are dramatic changes in the tax treatment of nonqualified deferred compensation plans. They are generally effective for amounts deferred in taxable years beginning after Dec. 31, 2004, with an important qualification. Amounts deferred in taxable years beginning before Jan. 1, 2005, are subject to the new rules if the plan is materially modified after Oct. 3, 2004.

Under the new rules, all amounts deferred under plans for all taxable years are currently includable in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income, unless certain requirements are satisfied. If not satisfied, in addition to inclusion, interest at the underpayment rate plus 1 percentage point is imposed on the underpayments that would've occurred had the compensation been includable in income when first deferred, or if later, when not subject to a substantial risk of forfeiture. The amount required to be included in income is also subject to a 20 percent additional tax.Generally, distributions from a nonqualified deferred compensation plan may be allowed only upon separation from service, death, a specified time (or pursuant to a fixed schedule), certain changes in control of a corporation, occurrence of an unforeseeable emergency, or if the participant becomes disabled. The plan may not allow distributions other than upon the permissible distribution events and, except as provided in regulations, may not permit acceleration of a distribution. There is a special rule for key employees of publicly traded corporations so that distributions may not be made earlier than six months after the date of the separation from service or on death.S corporation reform and simplification. These provisions directly affect and benefit S corps, and are generally applicable to taxable years beginning after Dec. 31, 2004:

* Family members may elect to be treated as a single shareholder.

* The number of eligible S corp shareholders is increased to 100.

* Bank S corp eligible shareholders are expanded to include IRAs (effective Oct. 22, 2004).

* Unexercised powers of appointment are disregarded in determining who are potential current beneficiaries of an electing small business trust.

* The transfer of suspended losses incident to divorce are attributed to the transferee.

* Deductibility is permitted for suspended losses under passive activity loss and at-risk rules by qualified Subchapter S trust income beneficiaries.

* An exclusion of investment securities income from the passive income test for bank S corporations is added.

* Relief is provided from inadvertently invalid qualified subchapter S subsidiary elections and terminations.

* Repayment of loans for qualifying employer securities doesn't violate qualification requirements and isn't considered a prohibited transaction applicable to distributions with respect to S corp stock made after Dec. 31, 1997.Greater expensing through 2007. There is a two-year extension of the increased Section 179 indexed-for-inflation expensing amount of $100,000. The $25,000 figure is scheduled to return in 2008.Charitable contribution changes. Effective for contributions of qualified vehicles (automobiles, boats, airplanes, etc.) made after Dec. 31, 2004, if the donee sells the vehicle without any significant intervening use or material improvement, the deduction can't generally exceed the gross sales proceeds.For a contribution of a patent or most other intellectual property made after June 3, 2004, the initial deduction is limited to the lesser of the basis or the fair market value of the property. An additional deduction is permitted in the year of contribution or in subsequent years based on a specified percentage of the qualified donee income received or accrued with respect to the property.

For contributions after June 3, 2004, C corps must obtain a qualified appraisal of the property other than cash, inventory, publicly traded securities or a qualified vehicle if the amount of the deduction claimed exceeds $5,000. Also, if a contribution exceeds $500,000, an appraisal must be attached to the tax return.

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