Presentation on theme: "IRC 199, Domestic Production Activities Deduction December 2, 2006 NJSCPA’s Mercer Chapter Tax Seminar."— Presentation transcript:
IRC 199, Domestic Production Activities Deduction December 2, 2006 NJSCPA’s Mercer Chapter Tax Seminar
Purpose and Origination Designed to stimulate the US economy & increase manufacturing domestically. Part of the American Jobs Creation Act of 2004 that was signed into law by President Bush on Oct 22, 2004 in response to the outcry for a repeal to the ETI exclusion. Most significant piece of tax legislation since the Tax Reform Act of 1986.
Key words, Glossary and Abbreviations DPAD – Domestic Production Activities Deduction DPGR – Domestic Production Gross Receipts NAICS – North American Industry Classification System QPAD – Qualified Production Activities Deduction MPGE – Manufactured, Produced, Grown, Extracted QPP – Qualified Production Property QPAI – Qualified Production Activity Income = DPGR – CGS allocable to the DPGR CGS – Cost of Good Sold Section 861 – Allocation method EAG – Expanded Affiliate Groups (more than 50%)
(continued) Keep in mind that the deduction is calculated on a net profit basis – in other words, allocate less cost! Item by Item basis – Term used to describe the cumbersome process of isolating QPAI (could be +/-). Safe Harbor Method – A term used to determine if DPGR are performed “in whole or in significant part” in the US. (I.e. when at least 20% of the total conversion costs occur in the US; cc=direct labor & factory burden) QPP – Qualified Production Property (Tangible Personal Property, computer software & sound recordings).
Overview and Benefit Deduction = 3% of QPAI in tax years 2005, 2006 6% Deduction in 2007, 2008, 2009 9% in 2010 and all subsequent years. De minimus rule: All of a taxpayers Gross receipts can be treated as DPGR if less than 5% of the total taxpayers gross receipts are non qualifying
Limitations Limited to 50% of the of the W-2 Wages paid by the taxpayer for the taxable year. Payments to independent contractors do not qualify as W-2 wages. Payments to partners and self employment wages do not constitute W-2 wages. Allows joint couple to combine their indivdual Schedule C, provided test is met.
EXCLUSIONS Construction Services which are cosmetic in nature such as painting and wall covering. Leasing or Licensing of items to a related party. Selling food or beverages prepared at a local establishment (but subject to sales tax…..)
Qualified Activities 1.Manufacture (cars, machinery, etc.) 2.Production (chemical production) 3.Growth (Timber and agriculture) 4.Extraction (Oil, gas, minerals) 5.Potable Water (Utilities) 6.Computer Software (CD or DVD) 7.Sound Recordings & Qualified Films 8.Substantial Rehab/Erection of Real Property
Management Responsibility 1.Analyze Operations to segregate all significant revenue generation activities. 2.Identify pools of costs related to operations by Direct, Indirect or COGS. 3.Determine correct allocation methods. 4.Create a model to determine the most effective and appropriate cost allocation method. 5.Compute the projected tax benefits at both the federal and state level and evaluate FAS 109. 6.Innovate and create changes to maximize the benefit.
Allocation Methods IRC Section 861 Method of Allocation. (applies to larger taxpayers) Mandatory unless the 2 following methods can be applied: Simplified Deduction Method (applies to other costs) – Annual gross receipts <= $25 mil., or total assets at year end are <= $10 mil (mid sized businesses) Small Business Simplified Overall Method (applies to CGS) –Annual gross receipts <= $5 mil, and COGS <= $5mil
“Pass Through Entities” The owner of the PTE does not need to be engaged directly in the entity’s trade or business. Owner of a PTE aggregates items of income and expense from the entity including W-2 Wages with it’s own items of income and expense for the purposes of allocating deductions to DPGR.
Formula Lesser of Taxable Income(w/o DMD) or Net QPAI (= DPGR – allocable CGS – other allocable expenses =) X 3%, limited to 50% of W-2 wages reported on or before the 60 th day after the due date (including extensions) of the information return filed with SSA.
Entity Limitations Deduction cannot exceed AGI for: –Sole Proprietors –Partnerships –S Corporations –Single Member or Disregarded LLC’s –For C Corporations, the deduction cannot exceed taxable income computed without regard to IRC Sec. 199. Nor can the DMD increase or create an NOL.
Section 199(c)(4)(A) defines DPGR to mean the taxpayer’s gross receipts that are derived from: (i) any lease, rental, license, sale, exchange, or other disposition of (I) qualifying production property (QPP) that was manufactured, produced, grown, or extracted (MPGE) by the taxpayer in whole or in significant part within the United States; (II) any qualified film produced by the taxpayer; or (III) electricity, natural gas, or potable water (collectively, utilities) produced by the taxpayer in the United States; (ii) in the case of a taxpayer engaged in the active conduct of a construction trade or business, construction of real property performed in the United States by the taxpayer in the ordinary course of such trade or business; or (iii) in the case of a taxpayer engaged in the active conduct of an engineering or architectural services trade or business, engineering or architectural services performed in the United States by the taxpayer in the ordinary course of such trade or business with respect to the construction of real property in the United States.
The proposed regulations provide that an item is defined as the property offered for lease, rental, license, sale, exchange or other disposition to customers that meets the requirements of section 199. The proposed regulations also provide several examples to illustrate this rule. Some commentators observed that the examples involving a manufacturer of toy cars that sold the cars to toy stores appear to imply that, in the case of property offered for lease, rental, license, sale, exchange or other disposition by a wholesaler, the item is defined with reference to the property offered for sale to retail consumers by the wholesaler’s customer. The rules for defining an item, and the related examples, have been clarified in the final regulations to provide that an item is defined with reference to the property offered by the taxpayer for lease, rental, license, sale, exchange or other disposition to the taxpayer’s customers in the normal course of the taxpayer’s business, whether the taxpayer is a wholesaler or a retailer. Item by Item Basis