Discussion Archives:Domestic Production Deduction
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8 November 2005 | |
| Is this a deduction just for large corporations or can it be of help to a self-employed person, having 1 employee? I recently attended a tax school sponcered by the Il.University. This was one of the last items discussed and not much time was given to it. I have a several clients that have small businesses and have employees. One of them is a carpenter who does siding and home remodeling. I am wondering if his installation of these materials will quilify. Thank you Lkfordham 16:55, 8 Nov 2005 (CST) | |
| 17 November 2005 | |
| The American Jobs Creation Tax Act of 2004 created new code sec. 199 that provides a deduction for both corporation and individual business owners, effective for years beginning after 2004. The main beneficiaries of this deduction will be businesses that produce goods, develop software or construct property in the U.S. For tax years 2005 or 2006 the percentage is only 3%. Here are some of items not included as domestice production gross receipts. Sale of food or beverage prepared at a retail establishment. For this purpose, a retail establishment is real property leased, occupied or otherwose used by he taxpayer in its trade or business of selling food or beverages to the public at which retail sales are made. Therefore, a restaurant at which food and beverage are prepared, sold, and served to customers (or that offers only take-out food) is a retail establishment and not eligible for te production deduction. However, if the facility is only used to prepare food and beverage for wholesale sale, it is not a retail establishment and receipts woul be DPGR. A facility at which food or beverage are prepard (whether for human or non-human consumption) will not be treated as a retail establishment if less than 5% of the food or beverages that are sold at the facility during the tax year are retail sales. I know this is long, but this code section is very complex. (DPGR)= Domestic Production Gross Revenue | |
| 17 November 2005 | |
| I too attended the UIS tax school although the location in which I attended they went into a lot of detail. It is my understanding that the deduction is limited to 50% of W-2 wages (not 1099 pay). They went on to say that farmers will qualify, but after checking my client base I find that my farmer clients do not have employees. This deduction is not restricted to large companies, but is a larger deduction when there is larger payroll. I believe the contractor issue requires the production and not repair. I have basement contractors (new construction) that will qualify, but carpet layers will not. At least that is my understanding of how this works. I would have to conclude that those carpenters that do mostly remodling and repair would not qualify. | |
| 27 November 2005 | |
| It is computed on form 8903 which is available in draft form at irs web site - do search on "draft forms"
Do a dry run on it and you will see a business must have employees irrespective if other qualifications are met. | |
| 19 January 2006 | |
| I am confused about this new deduction. Are seeds qualifying property where the gross receipts of the business are from the retail sale of seeds to US growers purchased from US companies. What if seeds are purchased from foreign wholesalers and sold to US farmers? How about buying from US wholesalers and sold to foreign growers? Any help will be appreciated. | |
| 19 January 2006 | |
| I see no problem with the retail or wholesale sale of seeds grown in the United States. However, I see no way to get this deduction for seeds grown in foreign country. | |
| 20 January 2006 | |
| I am wondering how the Domestic Production Deduction applies to the typical self employed
farmer who may or may not have any employees. If the farmer raises small grains which are sold to local grain elevators and raises beef cattle which is sold at local livestock auction does he qualify for the deduction and what information is taken from the sch F to form 8903? | |
| 21 January 2006 | |
| The deduction is directly tied to W-2 Wages. Do W-2 wages paid to your employees through a leasing company count as your W-2 wages for calculating the deduction? | |
Kateherman (talk|edits) said: | 29 January 2006 |
| duplicate post - see the question and many responses here: Discussion:Domestic production activities deduction - wages?. | |
Don@boyers (talk|edits) said: | 30 January 2006 |
| In terms of the S corp financials, do people generally report this type of deduction on the corporate financials (which we use to compute stockholder distributions) or just leave it off and report it on the K-1? | |
Marymac503 (talk|edits) said: | 28 February 2006 |
| In regards to the Form 8903, Domestic Activities Deduction, is a newly built strip mall and or office bldg, eligible for this deduction? These bldg were not built for sale but for lease, which will happen in 2006 | |
| 10 March 2006 | |
| I have limited partnerships that own and lease self-storage units. Would they be eligible? What about if they were to purchase an existing facility and substantially renovate it before leasing? Would that make them eligible for the renovation year? | |
| 30 September 2009 | |
| lkfordham-It is for more than just large corporations but you do need to have W-2 wages to be eligible. The carpenter needs to be on the payroll and provide a substantial renovation to the property. This means enhances property life, value, or changes its princible use.
Snooks-Your farmer clients could qualify if they just put themselves on payroll but you have to weigh the benefits of say filing an S-election and doing payroll as opposed to keeping cash in hand instead of the expenses and hassle of having employees creates. How much is the deduction really worth to them? Susanrid-Seeds that are purchased for retail sale do not qualify. If your client produces the plants that make the seeds then they qualify. If they purchased them from a US company that made the seeds then that US company gets the deduction. This deduction is designed to inhibit foreign production and encourage US jobs hence the W-2 wage limit of 50%. | |
| 30 September 2009 | |
| Dhanson-The farmer is doing all the necessary things to qualify except that they need W-2 wages to meet the limitation requirements.
Susanrid-Riley2 is correct regarding W-2 wages defined when using this deduction. Kateherman-Officer salaries do apply as long as they are listed using form W-2. Don@boyers-My suggestion is is the S corp has one shareholder and the work done is all they do for the corp and they are the employee I have the corp calculate it and post on the K-1. If there are multiple shareholders or the wages need to be spread among a few people it is best to stay in line with the IRS and keep their calculations seperated by providing the information the shareholders so their own CPA can calculate it. | |
| 30 September 2009 | |
| Marymac503-If the client owned and carried the burdens of ownership (paid for contractors, materials, and would have taken the loss if the project failed) they could take the deduction on the construction of the strip mall. However, DPGR says you can claim the gross receipts from lease of QPP but the strip mall is now considered real property and not personal property.
Chrisk-Leasing of the storage units would not qualify as the gross receipts are from real property (see above response). But, if they purchased and substantially renovated the building that would qualify assuming they met ownership and burden rules for that year. | |
| 30 September 2009 | |
| Correction to Marymac503 & Chrisk-rEG. 1.199-3(m)(6)(v), Ex. 1 provides an exception to having benefits and burdens of ownership regarding construction. You will have to see whether it applies to your client situations. | |
| 30 September 2009 | |
| CPA-1040, do you realize that you are answering questions from four years ago? With the exception of Solomon and Riley2, I haven't seen any of these people with whom you wish to communicate in over 3 years. I'm quite sure that the tax returns that those people were working on four years ago have now been filed (finally). | |
| 1 October 2009 | |
| Yes I realized that. It bugs me when I put up a question and it takes 2+ years to get an answer on some other sites so I was wanted to answer the questions I knew an answer to as I came across them. Besides, Susanrid may have taken retail sale of seeds to heart and need to amend returns now. | |
| 1 October 2009 | |
| It looks like people on here say you taught this? My question was weather work-over for oil & gas counts as pre-production or is it subject to the 2010 reduction retaining 6%. We have some guys who produce sound logs during the exploration phase and aren't involved with production, extraction, distribution, etc. I thought they would qualify in general but didn't know about the limitations in future years. Thanks for the help if you have any. | |
| 1 October 2009 | |
| If there is anything in abundance here on this site, it is opinions and answers. Questions from tax pros (especially those who fill out their profile ) get answers very quickly. And wrong answers get corrected even quicker. | |
| 29 June 2010 | |
| Thank you Cpa1040 for taking the time to share your knowledge on the subject the Tax Almanac community. I feel the same way. Even if those original posts have long since had their ?? answered through another means it provides value to those of us who come to the Almanac first for guidance. | |
| 19 August 2012 | |
| I agree! Here I am 3 years later researching the deduction! | |
| 19 August 2012 | |
| I agree! Here I am 3 years later researching the deduction! | |
