Domestic Production Activities Deduction
The American Jobs Creation Act of 2004 created a new deduction for domestic production activities to be phased in over a 5-year period. For 2005 and 2006, the deduction is based on 3% of the lesser of qualified production activities income or taxable income (adjusted gross income for individual taxpayers) determined without regard to the deduction. For 2007-2009, the deduction percentage rises to 6% and then to 9% for subsequent years. In general, the amount of deduction allowable for any taxable year is limited to 50% of W-2 wages paid by the taxpayer.
Qualified Production Activities Income - the excess of the taxpayer’s domestic production gross receipts over the sum of the cost of goods sold allocable to those receipts, other deductions, expenses, or losses directly allocable to such receipts, and a ratable portion of other deductions, expenses, and losses that are not directly allocable to such receipts or another class of income.
Domestic Production Gross Receipts – in general, the gross receipts of the taxpayer derived from the following:
1) Construction performed in the United States.
2) Engineering or architectural services performed in the United States for construction projects in the United States.
3) Any lease, rental, license, sale, exchange, or other disposition of:
- Qualifying production property which was manufactured, produced, grown, or extracted in whole or in significant part within the United States.
- Any qualified film produced by the taxpayer.
- Electricity, natural gas, or potable water produced by the taxpayer in the United States.
Exceptions include the sale of food and beverages prepared by the taxpayer at a retail establishment and the transmission or distribution of electricity, natural gas, or potable water.
Qualifying Production Property - tangible personal property, any computer software, and property described in IRC § 168(f)(4).
Qualified Film - any property described in IRC § 168(f)(3) if not less than 50 percent of the total compensation relating to the production of such property is compensation for services performed in the United States by actors, production personnel, directors, and producers. Such term does not include property with respect to which records are required to be maintained under section 2257 of title 18, United States Code.
There are related party and other special rules that apply to the domestic production activities deduction. See IRC § 199 for details.