We are pleased to inform you about a new deduction included in the American Jobs Creation Act of 2004 that was signed into law on October 22, 2004. This new deduction is for tax years beginning in 2005. The complexity of this new law may require you to separately account for certain income (and the costs associated with that income) to maximize your possible deduction, therefore requiring some changes to how you maintain your books beginning in 2005.
Here is a general summary of the new deduction which may be available to you:
This new deduction is equal to a percentage of the income earned from certain manufacturing, construction and production activities undertaken in the
U.S.
In 2005, the deduction is equal to 3% of a taxpayer’s “qualified production activities income” for the tax year. For example, if your net income is $100,000 and 100% of your income and deductions are from “qualified production activities” you could be entitled to an additional deduction of $3,000 in 2005. The percentage is scheduled to increase to 6% beginning in 2007 and to 9% beginning in 2010.
This deduction is limited to 50% of W-2 wages paid by the taxpayer; therefore ,this deduction is only available if the taxpayer is an employer that pays W-2 wages. Also, this deduction is limited to taxable income and, therefore, it cannot create a loss.
The following are many of the activities considered “qualified production activities” (remember, these activities must be performed in the
U.S.
):
-
Residential and Commercial Construction (performed by a general or subcontractor)
-
Engineering and Architectural services for construction projects in the
U.S.
-
Farming Activities
-
Manufacturing Activities
-
Food Production
-
Film and Music Production
-
Production of Electricity, Natural Gas and Potable Water
-
Computer Software Development in the
U.S.
-
And generally, the sale, lease, rental, license, exchange or disposition of a tangible product that is manufactured, produced, grown or extracted by the taxpayer in the
U.S.
The new law specifically excludes the sale of certain food and beverages prepared by a taxpayer at a retail establishment, i.e. sales of food and beverages at restaurants.
Here’s what you need to do to take full advantage of this new deduction:
- Maintain separate accounts in your bookkeeping system for income from “qualified production activities”
- Maintain separate accounts in your bookkeeping system for the cost of sales directly allocable to this income
- Maintain separate accounts in your bookkeeping system for other deductions, expenses, or losses directly allocable to this income
- Depending on your accounting method, a ratable portion of indirect costs will be allocated to your “qualified production activities income”
- If less than 5 percent of your total gross receipts are from items other than “qualified production gross receipts”, you may treat all gross receipts as from “qualified production” and, therefore, are not required to allocate your gross receipts.
- Although separate accounting is not a requirement, it is the best way to insure proper allocations of income and expenses.
We hope this letter has given you general information regarding this new deduction made available through the American Jobs Creation Act of 2004. If you would like to discuss your options regarding this new deduction, please make an appointment with us at your convenience.
Very Truly Yours,
SOUKUP, BUSH, & ASSOCIATES P.C.
