Section 199 Tax Breaks affect Manufacturers and other Industries

The new Section 199 tax break for domestic producers in the American Jobs Creation Act of 2004 provides for significant tax benefits for manufacturing firms.

Media estimates indicated that the tax break could be worth $76 billion over the next 10 years — a phased-in deduction of 3 percent in 2005 and 2006, 6 percent from 2007 through 2009, and 9 percent thereafter.

It will have an impact on a wide range of sole proprietors, partnerships and LLCs. The list of industries affected includes U.S. manufacturing, production, growth, or extraction of tangible personal property, software development, and music recording; U.S. production of movies, television, and video; U.S. production of electricity, natural gas, and water; U.S. construction or substantial renovation of real property, and U.S. performance of engineering and architectural services.

The provision of Section 199 generally allows companies to deduct three activities for 2005 and, by 2010, nine percent of such income. The deduction is calculated on Form 8903, “Domestic Production Activity Deductions.”

The proposed regulations (published October 20, 2005) along with Notice 2005-14 create the ground rules that taxpayers must follow on order to receive the benefit of this new deduction. Rules for determining Qualified Production Activities Income (QPAI) are established and if there is a conflict between the Proposed Regulations and Notice 2005-14, taxpayers can choose which one to rely upon.

“This is new language created in the tax code that added another layer of complexity to our tax compliance for those who want to pay the lowest possible tax,” said Groen, Kluka & Company Managing Partner Jeffrey Groen. The regulations are proposed to be effective for taxable years beginning after December 31, 2004, and taxable years of pass-thru entities beginning after December 31, 2004.

For more information about the Section 199 deduction, contact Jeff Groen or Bill Barnes at Groen, Kluka & Company at 248-362-5000.