There is a new tax deduction for a percentage of business income earned from manufacturing and certain other production activities occurring in the United States The deduction is available to regular C corporations, S corporations, partnerships, sole proprietorships, cooperatives, and estates and trusts, and is applicable to taxpayers that may not typically be considered “manufacturers” (certain kinds of construction firms, software developers, some utilities or power producers, architectural and engineering firms, and film or television production companies).
The deduction equals a percentage of the lesser of:
Applicable Deduction Percentage
| Tax Year Beginning in: | Percentage |
| 2005 | 3% |
| 2006 | 3% |
| 2007 | 6% |
| 2008 | 6% |
| 2008 | 6% |
| 2010 and later | 9% |
The deduction is limited to 50% of the wages paid by the taxpayer during the calendar year that ends in the tax year. Wages include elective deferrals made to 401(k) plans and other retirement plans.
In determining qualified production activities income, the qualified production gross receipts are reduced by certain items, including, among others, the cost of goods sold allocated to those receipts and other deductions, expenses, or losses directly allocable to the receipts.
It is obvious that the new law offers significant benefits to nearly every American business engaged in some aspect of manufacturing or other production activity in the United States. It’s also no surprise that this new deduction is very complex and professional guidance is required to determine what actions you need to take in your business planning to take full advantage of the new deduction.
We recommend you look at a variety of financial and operational areas to compute the possible benefits under the new law. For example, you may determine that now is a good time to consolidate operations in order to qualify for a higher deduction. You may choose to make certain investments or maximize certain kinds of activities that increase the amount of qualified income over time.
If you have any questions about whether or not you qualify for this deduction, please contact us at info@bdmp.com and a tax advisor will be in touch with you.