Domestic Manufacturing Deduction Creates New Benefit for Taxpayers: New Tax Law Provides for Significant Tax Planning Opportunities
Spritz, Keith B., The National Public Accountant
The focus of the American Jobs Creation Act of 2004 is the repeal of the Extraterritorial Income Exclusion (ETI) and the replacement of ETI with the domestic manufacturing deduction. Potential beneficiaries of this deduction include not only manufacturers, but also handlers of agricultural products; software companies; film production companies; electric, gas, and water companies; construction companies; engineering firms; and architectural firms. While the final regulations have not yet been issued for the domestic manufacturing deduction, it is not too early to start planning for tax purposes.
Domestic Manufacturing Deduction
The American Jobs Act creates a 3, 6 or 9 percent deduction for domestic manufacturing activities. This deduction applies to all taxpayers deriving income from qualified domestic production activities, regardless of whether they are exporters. The deduction phases in at 0 percent for 2004, 3 percent for 2005-2006, 6 percent for 2007-2009 and 9 percent for years thereafter.
The deduction is a percentage of the lesser of the qualified production activities income (QPAI) of the taxpayer for the tax year or the taxable income for the tax year. Companies with net operating losses or net operating loss carryovers that eliminate current year income will not be able to take advantage of this deduction. The deduction is further limited by wages; the deduction cannot exceed 50 percent of W-2 wages, regardless of whether employees are engaged in qualifying production activities.
Qualified production activities income equals domestic production gross receipts reduced by the cost of goods sold allocable to such receipts, other deductions, expenses or losses that are directly allocable to such receipts, and a proper share of other deductions, expenses, and losses that are not directly allocable. …