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ETI REPEAL - QUICK TAKES

October 07, 2004

The ETI bill hammered out yesterday by the House-Senate conference is over 400 pages long. The new deduction for "Qualfied Production Activity Income" may be the most far-reaching piece of the bill, but there are many other notable provisions.

- The bill repeals the "Extraterritorial Income Exclusion," or ETI. This provision is the reason the bill was so urgent. The World Trade Organization ruled the ETI an illegal subsidy and has imposed trade penalties against the US because of it. The ETI repeal is designed to end the trade penalties. The ETI deduction will be reduced 20% in 2005 and 40% in 2006, then disappear altogether.

- It has a number of S corporation provisions, including an increase in the number of S corporation shareholders to 100, a provision to enable banks with IRA shareholders to make S elections, and an exclusion of investment income from "passive investment income" for S corporation purposes.

- It will reduce the maximum Section 179 deduction for sport-utility vehicles to $25,000.

- It will greatly restrict the ability to take inflated deductions for cars donated to charity.

- It will allow taxpayers to elect to deduct sales taxes instead of state and local income taxes. This presumably helps win the support of Senator Daschle of South Dakota, whose state has a sales tax, but no income tax. It will be popular among many ex-Iowans who have migrated to Florida. Unfortunately, this deduction won't apply for alternative minimum tax.

- Legal fees of pursuing civil rights claims will be allowed as a deduction for regular tax and AMT, regardless of whether the taxpayer itemizes, to the extent of income from the suit.

- New information reporting requirements for acquiring corporations in taxable mergers and acquisitions. A new form will require a description of the acquisition, the name and address of shareholders required to report gain, and the amount of transaction proceeds. This will be effective on enactment.

- New tax shelter provisions, penalties and reporting rules, including a ban on "SILO" transactions.

- Strict new rules on the ability to be treated as a "resident" of a US possession, such as the Virgin Islands.

And much, much more!

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