Fall 2006 issue of Horizons

INDUSTRY MANUFACTURING & DISTRIBUTION §199 Production Activities Deduction - New Rules

Linda Paradis, CPA

Mike Lewis, CPA

By this time, many of us have filed our 2005 tax returns reflecting the first year of the Production Activities Deduction. Legislative changes as well as additional regulations issued by Treasury have provided interesting guidance on the Production Activities Deduction. This article includes a description of some of these changes for manufacturers.

First, let's review a summary of the basic calculation:

Qualified Production Gross Receipts from 'Manufacturing within the U.S.'

-- Less Allocable Cost of Goods Sold

-- Less Allocable Selling, General and Administrative Expenses

= Equals Qualified Production Activities Income (QPAI)

Lesser of QPAI or Taxable Income

X Times Rate of Deduction (3% for 2005 - 2006, 6% for 2007 - 2009, 9% in 2010)

= Equals Preliminary Deduction

Lesser of Preliminary Deduction or 50% of W-2 wages

= Equals Domestic Manufacturing Deduction

45 • summer 2006 issue