TaxAlmanac:Featured article/March 3, 2006

From TaxAlmanac

Deduction for Domestic Production Activities

Overview

The American Jobs Creation Act of 2004 added the domestic production activities deduction, a tax benefit for certain domestic production activities. This deduction provides a tax savings against income attributable to domestic production activities. The Act created new Internal Revenue Code Section 199 and is available to corporations, individuals, and pass-thru entities such as S Corporations, partnerships, estates and trusts. For the pass-thru entities, the deduction is applied at the individual partner, shareholder, or similar level. This deduction is available for tax years beginning after December 31, 2004.

Computation

For 2005 and 2006, the deduction equals 3% of the lesser of: (a) qualified production activities income; or (b) taxable income for the taxable year. However, 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 in such taxable year. The deduction is phased-in; for 2007 through 2009 the percentage increases to 6% and for 2010 and after the percentage will be 9%.

Activities

Qualified production activities include manufacturing, producing, growing, and extracting tangible personal property, computer software, and sound recordings, and the construction and substantial renovation of real property including infrastructure. The production of certain films is also a qualifying activity as are certain engineering or architectural services.

Gross Receipts

For gross receipts to be considered domestic production gross receipts that are used in calculating qualified production activities income, ...