On October 22, 2004, President Bush signed into
law the American Jobs Creation Act, which includes
a tax deduction relating to income from certain
domestic production activities, effective for
taxable years beginning after December 31, 2004
(Section 199 of the Internal Revenue Code (IRC)).
What are domestic production activities? Qualified
production activities include the manufacture,
production, growth or extraction in whole or
in significant part, within the United States,
of tangible personal property (e.g., clothing,
goods and food).
For taxable years beginning in 2005 and 2006,
the deduction equals 3 percent of the lesser
of (a) qualified production activities income
or (b) taxable income for the taxable year. The
deduction for a taxable year is limited to 50
percent of the W-2 wages paid by the taxpayer
during the calendar year that ends with or within
the taxpayer’s taxable year.
The first step in calculating a company’s
domestic production activities deduction is to
segregate activities among qualified and non-qualified
production activities.
The second step is determining the ‘qualified
production activities income’ which includes
domestic production gross receipts less allocated
cost of goods sold and other deductions.
For pass-through entities (partnerships and S
Corporations) the IRS confirms the deduction
is determined at the partner or shareholder level.
As such, each partner or shareholder must compute
the deduction separately based upon information
provided by the pass-through entity.
For more information on this deduction and the
qualifications to determine if your business
meets the criteria of IRC Section 199, please
consult with your tax advisor. Tax Topic provided
by Dottie L. Lloyd, CPA, Tax Manager, Jones and
Company, Ltd., Paragould, AR
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