The new tax deduction for manufacturing applies to most manufacturing companies, but also to some non-manufacturing companies and to some self-employed individuals. It was enacted as part of the American Jobs Creation Act of 2004 to help United States manufacturers remain competitive with similar foreign compa
The new tax deduction for manufacturing applies to most manufacturing companies, but also to some non-manufacturing companies and to some self-employed individuals. It was enacted as part of the American Jobs Creation Act of 2004 to help United States manufacturers remain competitive with similar foreign companies after several export tax benefits were repealed.
The deduction could be a substantial tax savings to those who qualify. The objective of the new deduction is to allow taxpayers a deduction equal to a statutory percentage multiplied by the lesser of a taxpayer’s qualified production activities income for a tax year or a taxpayer’s taxable income for that year.
The deduction is allowed for both regular and alternative minimum tax purposes and can be applied to tax years beginning in 2005. You may want to check to see if your company qualified for this deduction in 2005, but did not claim it. The applicable deduction percentage for 2006 is 3 percent. That percentage will increase to 6 percent in 2007 and to 9 percent after 2009. However, the amount of the deduction is limited to 50 percent of the wages paid by the taxpayer to the taxpayer’s employees during the year.
You may ask, what is “qualified production activities income?” It is the excess of domestic production gross receipts over the sum of the costs of goods sold allocable to such receipts, as well as other deductions, expenses and losses directly allocable to such receipts and a ratable portion of not directly allocable items to such income. In the near future, recordkeeping of these direct and indirect expenses will need to be maintained in order to calculate the appropriate allocable expenses.
Domestic production gross receipts are defined as the taxpayer’s gross receipts that are derived from any lease, rental, license, sale, exchange or other disposition of qualifying property that was manufactured, produced, grown or extracted by the taxpayer in whole or in significant part within the United States.
Qualifying property is any tangible personal property or any computer software. Some of the less obvious domestic production categories that qualify could be, but is not limited to, any qualified film produced, electricity, natural gas or potable water produced, construction performed, and engineering or architectural services performed. However, the sale of food and beverages at a retail establishment, and the transmission or distribution of electricity, natural gas, or potable water is excluded from domestic production income. Many other forms also qualify as domestic production that have not been listed.
If you are a pass-through entity such as a partnership, S corporation, estate or trust, generally the manufacturers deduction is passed through to the partner, shareholder or beneficiary and taken as a deduction on his or her tax return. However, the wage limitation on the deduction has specific guidelines as to how much of the wages are to be allocated to each individual, so be aware of these guidelines when making the calculation on your tax return.
In the case of an individual who is self-employed, the rules provide that the deduction is equal to the applicable percent of the lesser of the taxpayer’s qualified production activities income for the tax year or the individual’s adjusted gross income for the tax year.
The new manufacturing deduction can save a company or an individual substantial tax dollars. Obviously, the discussion above was just a basic overview of the manufacturing deduction. Make sure you understand the requirements to qualify for taking the deduction before you deduct it on your tax return. Consult with your tax advisor about accurately calculating this complex deduction according to the guidelines.
nies after several export tax benefits were repealed. The deduction could be a substantial tax savings to those who qualify. The objective of the new deduction is to allow taxpayers a deduction equal to a statutory percentage multiplied by the lesser of a taxpayer’s qualified production activities income for a tax year or a taxpayer’s taxable income for that year. The deduction is allowed for both regular and alternative minimum tax purposes and can be applied to tax years beginning in 2005. You may want to check to see if your company qualified for this deduction in 2005, but did not claim it. The applicable deduction percentage for 2006 is 3 percent. That percentage will increase to 6 percent in 2007 and to 9 percent after 2009. However, the amount of the deduction is limited to 50 percent of the wages paid by the taxpayer to the taxpayer’s employees during the year. You may ask, what is “qualified production activities income?” It is the excess of domestic production gross receipts over the sum of the costs of goods sold allocable to such receipts, as well as other deductions, expenses and losses directly allocable to such receipts and a ratable portion of not directly allocable items to such income. In the near future, recordkeeping of these direct and indirect expenses will need to be maintained in order to calculate the appropriate allocable expenses. Domestic production gross receipts are defined as the taxpayer’s gross receipts that are derived from any lease, rental, license, sale, exchange or other disposition of qualifying property that was manufactured, produced, grown or extracted by the taxpayer in whole or in significant part within the United States. Qualifying property is any tangible personal property or any computer software. Some of the less obvious domestic production categories that qualify could be, but is not limited to, any qualified film produced, electricity, natural gas or potable water produced, construction performed, and engineering or architectural services performed. However, the sale of food and beverages at a retail establishment, and the transmission or distribution of electricity, natural gas, or potable water is excluded from domestic production income. Many other forms also qualify as domestic production that have not been listed. If you are a pass-through entity such as a partnership, S corporation, estate or trust, generally the manufacturers deduction is passed through to the partner, shareholder or beneficiary and taken as a deduction on his or her tax return. However, the wage limitation on the deduction has specific guidelines as to how much of the wages are to be allocated to each individual, so be aware of these guidelines when making the calculation on your tax return. In the case of an individual who is self-employed, the rules provide that the deduction is equal to the applicable percent of the lesser of the taxpayer’s qualified production activities income for the tax year or the individual’s adjusted gross income for the tax year. The new manufacturing deduction can save a company or an individual substantial tax dollars. Obviously, the discussion above was just a basic overview of the manufacturing deduction. Make sure you understand the requirements to qualify for taking the deduction before you deduct it on your tax return. Consult with your tax advisor about accurately calculating this complex deduction according to the guidelines.
