The American Jobs Creation Act of 2004 ("AJCA"), if signed into law by President Bush, potentially reduces federal income taxes for domestic utilities. The centerpiece of the AJCA is a new deduction for taxpayers that engage in certain United States production activities, which include the production by the taxpayer, but not the transmission or distribution, of electricity and gas in the U.S.
In general, the deduction will equal a statutory percentage of the utility’s gross income from qualifying (that is, production) activities after taking certain overhead expenses into account. The deduction percentage will be 3 percent for tax years beginning in 2005 and 2006, 6 percent for tax years beginning in 2007, 2008, and 2009, and 9 percent in tax years beginning after 2009. Consistent with AJCA’s job-generating or -preserving goal, the deduction will be capped at 50 percent of the utility’s W-2 wages for the year. Because of this cap, utilities may benefit less from the new deduction than labor-intensive manufacturers. The deduction also cannot exceed the utility’s taxable income for the year.
Utilities that produce, transmit, and distribute electricity or gas must allocate their revenues, direct costs, and overhead to production, transmission, and distribution activities under rules to be developed by the Treasury Department. Qualifying activities for gas producers are generally limited to the extraction of natural gas from the ground and its processing into pipeline-quality gas; the deduction may not be claimed with respect to revenues derived from the transmission of pipeline-quality gas from a transmission field or processing plant to a distribution network.
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