New Tax Deduction Starts This Year

The American Jobs Creation Act that was enacted in 2004 contained a bonus for some taxpayers. The domestic production activities deduction, effective for taxable years beginning after December 31, 2004, applies to profits earned from the following activities if they take place in the United States:

• Construction or substantial renovation of real property (buildings and infrastructure)
• Manufacture, production, growth or extraction of tangible personal property (e.g., clothing, goods, food) in whole or significant part, software development or music recordings
• Film production
• Production of electricity, natural, gas or water
• Engineering and architectural services

The deduction for the 2005 taxable year equals 3% of the lesser of either taxable income derived from a qualified production activity or taxable income for the taxable year. The deduction for a taxable year is limited to 50% of the W-2 wages paid by the taxpayer during the calendar year that ends at the same time or prior to the end of the taxpayer's year. The deduction will increase until it reaches a maximum of 9% in 2010.

For pass-through entities such as partnerships or S corporations, the deduction is computed separately for each partner or shareholder. There are provisions in the code to aggregate certain entities.

Determining the maximum allowable deduction is a complicated process. Contact us at 561-994-5050 if you would like further information about how this provision may affect you.