CONSTRUCTION Accounting ARTICLE -
2005 Tax Planning Opportunity - Production Activities Deduction
Starting in 2005, a 3% deduction is allowed for the portion of income attributable to U.S. manufacturing, construction, engineering and architectural services.
If there is an S corporation, income from the S corporation connected with the above activities will be allowed the additional deduction. Wages of the shareholders will still be taxed at the full rates. Therefore, it may be beneficial to reduce the shareholders wages, and increase the S corporations' income to take advantage of the additional deduction. Remember that the wages will have to be $210,000 per shareholder in order to maximize their pension contribution.
Taxpayers with a current year loss or with net operating losses will not benefit from the new deduction.
Since the deduction is not applicable for 2004, it may be more beneficial to accelerate deductions into 2004 since the lower rates will become effective in subsequent years.
Below is some additional information regarding the Production Activities Deduction. Please let me know if you have any questions.
The American Jobs Creation Act of 2004 allows a deduction of up to nine percent of the lesser of taxable income or qualified production activities income. The deduction cannot exceed 50% of the company's W-2 wages, but is allowed for both regular and alternative minimum tax purposes. The deduction is phased in as follows:
| Tax year beginning |
Amount of deduction |
| 2005 and 2006 |
3% |
| 200, 2008 and 2009 |
6% |
| 2010 and after |
9% |
Qualified production activities income applies to income from the license, lease, rental, sale, exchange or other disposition of:
- Construction performed in the United States; and
- Engineering or architectural services performed in the United States for construction projects in the United States;
- Any tangible personal property which is manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the United States;
- Motion pictures and television productions in the United States;
- Electricity, natural gas, or potable water produced in the United States.
The amount of income eligible for the deduction is equal to the gross receipts from the above activities less the cost of goods sold, direct expenses (i.e. selling expenses) and a proportionate amount of indirect expenses (i.e. general and administrative expenses).
The deduction is available to C corporations, S corporations, partnerships, estates and trusts.
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