BBB domestic production

By Bruce Brown, affiliate of Manufacturing-Works
www.manufacturing-works.com

One of the tax law changes enacted last year that helps manufacturers is the Deduction for Domestic Production Activities. The following discussion is an overview of the deduction and it must be taken as such. Manufacturing-Works encourages the reader to discuss this deduction with his or her tax professional.

A taxpayer is allowed to apply a deduction percentage to net income derived from qualified production activities income. The deduction percentages are:

1. For tax years beginning in 2005 and 2006, the deduction rate is 3%
2. For tax years beginning in 2007, 2008, and 2009 the deduction rate is 6%
3. For tax years beginning after 2009, the deduction rate is 9%

The deduction is applied to the lesser of the qualified production activities income of the taxpayer for the taxable year or the taxable income before this deduction (in the case of an individual, his or her adjusted gross income). Qualified production activities income is calculated as follows:

• Domestic production gross receipts
  Minus
• Cost of goods sold allocable to these gross receipts
  Minus
• Other costs directly allocable to these gross receipts
  Minus
• A ratable portion of any other deductions and expenses not directly allocable to these receipts

This example and definition effectively represents net income from qualifying activities.

Domestic production gross receipts are those receipts from any lease, rental, license, sale, or other disposition of “qualified production property” that was manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part in the U.S.

Domestic production receipts include:

• Qualified production property includes tangible personal property, any computer software and sound recordings.
• This also includes income from a qualified film produced by the taxpayer, or income from electricity, natural gas or potable water produced in the U.S.
• Domestic production gross receipts also include construction performed in the U.S. or engineering or architectural services performed in the U.S. for construction projects in the U.S.

The production deduction for any year cannot exceed 50% of the Form W-2 wages of the employer for that year.

Example:  Phil manufactures a new product that is sold as a component in a new snow blower.  Phil has gross receipts of $2,000, cost of goods sold of $500 and other expenses of $1,000.

Domestic production gross receipts  $2,000.00
Cost of goods sold  500.00   
Gross margin  1,500.00
Other expenses  1,000.00

Qualified production activities income  500.00
Deduction percentage  3%

Domestic production activities deduction  $15.00

W-2 wages paid $500.00

Since the deduction is lower than the ½ of the W-2 wages ($250.00) and there is qualify activity net income, the deduction is not limited and may be taken.

This is a simple example and it may not fit your circumstances. Manufacturing-Works recommends you discuss this deduction with you tax advisor.