May 13, 2005 -- The American Jobs Creation Act of 2004 introduced a deduction, beginning in 2005, for qualified domestic production activities, currently being referred to as the U.S. manufacturer or producer deduction.  The most significant aspect of this deduction is that after years of tax benefits that pertained only to U.S. exporters of manufactured goods, the new deduction is available for U.S. manufactured goods, regardless of where the goods are sold. In addition to traditional manufacturers of personal property, many businesses will qualify, including (but not limited to) those engaged in U.S.-based construction, production of electricity, gas, potable water, software production, film and video tape production, farming, and other activities mentioned in the legislation.  In addition, the deduction is available to all types of entities ranging from sole proprietors to corporations.

The deduction is generally calculated based on a percentage (that will increase ratably through 2009) that equals the lesser of the business’ qualified production activities income (QPAI) or taxable income. Qualified production activities income is briefly defined as the excess of domestic production gross receipts (DPGR) over the cost of goods sold plus other deductions, expenses or losses that are directly and/or indirectly allocable to such receipts. This deduction allows for a considerable amount of tax savings on the profits from qualified production activities that are “manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the United States .” 

It is imperative that businesses qualifying for the deduction maintain adequate records to support the calculations.  It is also possible that by changing certain business practices taxpayers may be able to maximize the deduction. 

For more information, contact Gene Ciccciola at (215) 564-1900 .

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