To: Clients and Friends
Re: New Business Deduction
A
new law for businesses has been passed creating what is known as the
manufacturing and production activities deduction. It may have widespread application to businesses that do not
think of themselves as manufacturers.
This deduction replaces the extra territorial income exclusion, which
has been repealed.
For
tax years beginning after 2004, business owners who have domestic production
gross receipts may be eligible for this deduction. Domestic production gross receipts are gross receipts of a
taxpayer that are derived from:
- Any lease, rental,
license, sale, exchange of qualifying production property that was
manufactured, produced, grown or extracted in the United States, even if
production is not your main activity.
- Construction performed
in the United States.
- Engineering or
architectural services performed in the United States for construction
projects in the United States.
Domestic
production gross receipts for this deduction does not include gross receipts
derived from services, retail sales, wholesale sales or sales of food and
beverages prepared by the taxpayer at an establishment.
Production
may have widespread application, for example, a dentist that makes impressions
may be production, or a photographer that develops his own pictures may be
considered production.
Please
note it may be necessary to isolate your production/manufacturing revenues and
expenses.
The
deduction available equals the lesser of:
- A percentage of the
lesser of-the qualified production activities income or taxable income
without regard to this deduction.
The percentage is 3% for tax years beginning in 2005 and 2006, 6%
for 2007-2009 and 9% thereafter.
- 50% of the sum of wages
paid by the taxpayer and the voluntary elective deferrals that are made by
the taxpayer during the year.
The
qualified production activities income as noted above is equal to domestic
production gross receipts reduced by the sum of:
- The costs of goods sold
allocable to such receipts
- Other deductions,
expenses or losses that are directly allocable to such receipts
- A ratable portion of
other deductions, expenses and losses that is not directly allocable to
such receipts.
The
deduction is available to S corporations, C corporations, partnerships and sole
proprietorships. If you qualify, or
think you may qualify, for this deduction we would welcome assisting in
establishing the record keeping necessary to determine the deduction available,
as well as to assist in distinguishing which of your sales qualify as domestic
production gross receipts.
