Representing the most significant tax reform for manufacturers in recent history, President Bush has signed the "American Jobs Creation Act of 2004" (AJCA). Among other things, it replaces the Extraterritorial Income Exclusion (ETI) with the Manufacturer's Deduction. While being called a replacement for the ETI, the Manufacturer's Deduction goes well beyond that for most midsized manufacturers.

Manufacturer's Deduction
All companies manufacturing within the United States should qualify for the benefit. The benefit is not based on exports, but rather on U. S. manufacturing. In addition, Congress defined manufacturing broadly and includes areas not traditionally referred to as manufacturing. This includes the sale, lease or license of:

--Property (including computer software) manufactured, produced, or grown by the tax
    payer
--Construction, engineering or architectural services
-- Electricity, natural gas, or potable water produced by the taxpayer
--Qualified film produced by the taxpayer

This tax deduction provides both cash flow and financial statement benefit. Once fully phased in, the effective tax rate could be three percentage points lower (e.g. from 35 percent to 32 percent). The deduction is phased in from 2005 through 2010 as follows:

2005 - 2006 3 percent
2007 - 2009 6 percent
2010 9 percent

S Corporation simplification and reform
Congress also made it easier to qualify as an S Corporation. The limit on the number of S Corporation shareholders has been increased from 75 to 100. Family members within six generations of one another are now treated as one shareholder for purposes of this limit.