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Section
199 Benefits Have Their Limit
Closely Held Conference Reviews Tax Breaks for Manufacturing and Other Activity Tax breaks under Section 199 of the American Jobs Creation Act may not be worth the effort to some clients, experts at a recent conference said. Section 199 could be seen as a response to the repeal of Extraterritorial Income (ETI) exclusions after the World Trade Organization declared them subsidies for American exporters. The section phases in tax breaks as a percentage of a tax liability on certain kinds of production activity. Experts at the Closely Held and Flowthrough Entities Conference, however, said that while these incentives for film production, construction and real estate development, and other activities looked promising on paper, a different story was emerging in the real world since the section went into effect earlier this year. “What’s surfaced in the marketplace is there’s a lot of record keeping and administrative costs that may outweigh the savings you might receive in taxes,” said Richard Nichols. Furthermore, Nichols added, the measure of incentives is based on W-2 wages, posing a problem for S corp clients that more commonly deal in distributions. “This may be more of an incentive for large manufacturing concerns,” Nichols said. “This was precipitated by the WTO knocking out the ETI which was an incentive to major manufacturers….(but) I don’t think this is going to be a homerun for most taxpayers.” Nichols and Ira Fox were the first two speakers at the July 27 conference, held at the Marriott Marquis in New York City. The conference attracted about 120 attendees, and covered New York state taxation, current developments affecting S corps and partnerships, and long-term care planning. Fox and Nichols discussed specific areas of the tax act. They said that while the act removed the bonus depreciation, taxpayers could still get a section 179 expense election through 2008. They mentioned the 15-year write-off for leasehold improvements and film production incentives, including the ability of a filmmaker to write off the entire cost of a production if it comes in at $15 million or less. The act also allows for organizations to write off the first $5,000 in start-up costs, as opposed to amortizing the costs over five years. But the area of the act that has gotten a lot of interest in the last year has been Section 199. The presenters said that the provisions affect construction, tangible personal property and electric generation. Breaks are not allowed for gross domestic production receipts (GDPR) derived from leased property, food and beverage sales, or transmission of electricity. S corps receive their measure of qualification as a passthrough entity, Nichols said, if 50 percent of the Qualified Production Activity is in the form of income wages paid by the taxpayer. This is where the incentive for S corp comes into question, as partners are not employees. The speakers said that guidance from the IRS is anticipated. Interim guidelines, they said, seemed to show that the law was trying to be sensitive to who actually has the burden of the costs of production. |
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