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A new deduction from taxable income (or, in the case of an individual,
from adjusted gross income) was created by The American Jobs Creation Act of
2004. The deduction is equal to
a portion of the taxpayer’s “qualified production activities” income.
The deduction is phased in over five years.
For taxable years beginning in 2005 and 2006, the deduction is three
percent of the lesser of (1) the qualified production activities income of
the taxpayer for the taxable year, or (2) taxable income for the taxable
year. In 2007, 2008 and 2009,
the deduction is six percent. After
2009, the deduction is equal to nine percent.
The deduction for a taxable year is further limited to 50 percent of the
wages paid by the taxpayer during the calendar year that ends in such
taxable year.
Qualified production activities income is equal to your domestic
production gross receipts, reduced by (1) the costs of goods sold that are
allocable to such receipts, (2) other deductions, expenses, or losses that
are directly allocable to such receipts, and (3) a proper share of other
deductions, expenses, and losses that are not directly allocable to such
receipts of another class of income.
In general, domestic production gross receipts are gross receipts a
taxpayer that are derived from any sale, exchange, other disposition, lease,
rental, or license of qualifying production property that was manufactured
or produced in whole or in a significant part within the U.S.
Domestic production gross receipts do not include any of your gross
receipts that are derived from the sale of food or beverages prepared by you
at a retail establishment, the transmission or distribution of electricity,
natural gas, or potable water, or property that is leased, licensed or
rented by you for use by any related person.
Qualifying production property generally includes any tangible personal
property, computer software, sound recordings, film, electricity or natural
gas, and construction, engineering, and architectural services. Qualified
film includes any motion picture film or videotape (including live or
delayed television programming, but not including certain sexually explicit
productions) if 50 percent or more of the total compensation relating to the
production of such film (including compensation in the form of residuals and
participations) constitutes compensation for services performed in the
United States by actors, production personnel, directors and producers.
Domestic producers that qualify for this new deduction are traditional
manufacturing, construction, engineering, energy production, computer
software, films and videotape, and processing of agricultural products.
As well, corporations, individuals, S corps, partnerships, estates,
trusts, and cooperatives can take advantage of this new deduction.
Accordingly, this deduction may affect your tax planning for tax years
beginning in 2005. If you have any questions about how this deduction
applies to you, or about any other aspects of the recent legislation, please
contact our office at your convenience.
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