Tax Break Creates Consulting Opportunities

Tax Break Creates Consulting Opportunities
Helping Clients Take Advantage of the Manufacturers’/Producers’ Deduction

By Surgent McCoy CPE, LLC

Accountants face a daunting but important task in providing advice on the Code 199 deduction, the so-called manufacturers’/producers’ tax deduction. The Foundation for Accounting Education and Surgent McCoy CPE, LLC, will present a full-day seminar on this subject on Monday, June 27, in Westchester; Tuesday, June 28, in New York City; Wednesday, June 29, near the Nassau/Suffolk border; Thursday, June 30, in Albany, and Friday, July 1, in Rochester.

Code 199 is the part of the American Jobs Creation Act of 2004 that will have a broad impact on the accounting profession.

According to the act, this deduction is related to income from “domestic production activities.” When fully phased in, it will be equal to 9 percent of the lesser of the qualified production activities income (QPAI) of the taxpayer for the taxable year, or the taxable income (determined without regard to Code 199) for the taxable year (adjusted gross income, in the case of an individual).

A Code 199 deduction starts at 3 percent for taxable years beginning in 2005 and 2006 and 6 percent beginning in 2007, 2008 or 2009. Deductions, however, cannot exceed 50 percent of the W-2 wages paid by the taxpayer during the calendar year that ends in such taxable year.

Many construction activities performed in the U.S. qualify for the deduction. This includes not only the prime construction contractor of residential or commercial buildings, but also all of the ancillary activities associated with the erection or substantial renovation of real property. All contractors and subcontractors on a job could qualify for the deduction. Electrical contractors may qualify the gross receipts from some of their jobs. Land improvements, such as grading and landscaping, and painting are considered “construction” under certain circumstances.

Farming activities performed may also qualify if a production process, such as packaging, or storage activity occurs at the farm location. Traditionally, many small farm operations have elected out of the uniform capitalization rules in the past and will need professional assistance to establish a cost-allocation system to maximize the deduction and maintain records to substantiate it.

Qualified production activity is somewhat of a misnomer, as it sometimes encompasses services. Engineering and architectural services qualify as domestic production activities. However, taxpayers will have to draw distinctions between manufacturing, production, growth and extraction, on the one hand, and services “embedded” in a production process, on the other, and separately account for them because of their different tax consequences.

In addition, cost allocation issues abound in the new law, and special rules apply to pass-through entities and their owners. See your tax advisor for details.

Surgent McCoy CPE, LLC, is a provider of tax and financial-planning continuing professional education. They can be reached at info@cpenow.com.