Fall 2006 issue of Horizons

Now, let's consider some of these recent changes.

included in domestic production gross receipts if the price for the service is not stated or bargained for separately. Final reg- ulations expand this exception to include Computer Software Maintenance contracts that meet these requirements. 5. Simplified Deduction Available to More Taxpayers - Regulations require larger taxpayers to do more in-depth cost allocations in determining QPAI. Fortunately, for businesses with less than $100 million in receipts or $10 mil- lion in assets at year's end, the simplified deduction method is now available. Under the simplified method, costs of goods sold are specifically allocated to domestic production gross receipts. Selling, general and administrative costs are allocated based on the ratio of QPAI receipts to total gross receipts. Other detailed changes may apply to your business. Please contact us to understand further how to maximize your Production Activities benefit. Questions? Contact Mike Lewis, CPA Partner-in-Charge, Manufacturing and Distribution Services Group 314-290-3391 mike.lewis@rubinbrown.com or Linda Paradis, CPA Manager, Tax Consulting Services Group 314-290-3382 linda.paradis@rubinbrown.com

1. Change to Wage Limitation - The deduction is limited to 50 percent of wages. Originally, this deduction was W-2 wages of the entity. For tax years beginning after May 17, 2006 (the 2007 year for calendar year taxpayers), only wages related to the production activities will be included as W-2 wages for the 50 percent limitation. 2. Flow-Through Loss Carry-Forwards Prior to May 1, 2005, Do Not Reduce Qualified Production Activities Income - If a partner or S corporation shareholder has suspended or at risk losses from a year prior to 2005 that are used to reduce allo- cable income in 2005 or after, these losses are not a reduction in qualified production activities income. This change may pro- vide an amended return opportunity for some taxpayers who reduced their deduction on a 2005 return filed prior to this recent change in the regulations. 3. Relaxation of the Item-by-Item Requirement - Final regulations clarify that activities must be considered on an item-by-item basis only in order to determine the gross receipts from qualified production activities. For computing the income from these activities, an item-by-item calculation is not required. 4. Embedded Services Exception Applies to Computer Maintenance Contracts - Certain qualified services (war- ranties, delivery, installation and operating manuals) can be

46 • summer 2006 issue