Construction Companies Benefit from New Tax Law
A new tax deduction sometimes referred to as the manufacturer’s deduction or the producer’s deduction, enacted as part of the American Jobs Creation Act of 2004, also brings good news to companies involved in certain construction activities.
The law’s focus is on projects within the United States, and to qualify, you must be in a trade or business that is considered construction, as defined in the North American Industry Classification System. It doesn’t matter whether your business operates as a corporation, a partnership, an LLC or a sole proprietorship.
If you make a profit from what the new law calls “qualified production activities,” you’re entitled to an extra deduction. The amount of the deduction is a phased-in percentage (starting at 3% this year; rising to 9% by 2009) of the lesser of:
- Taxable income, or
- Qualified production activities income, however
- The deduction is limited to 50 percent of the wages reported to employees on W-2 forms.
Qualified production activities income is defined as domestic production gross receipts (DPGR) less the sum of:
- The cost of goods sold allocable to DPGR;
- Other deductions, expenses and losses directly allocable to DPGR; and
- A proper share of other deductions, expenses and losses that isn’t directly allocable to DPGR or to another class of income.
Construction includes activities that are directly related to the erection or substantial renovation (not mere cosmetic changes) of residential and commercial buildings and infrastructures, and include engineering and architectural services. The constructed property must be:
- Real property;
- Inherently permanent structures other than tangible property in the nature of machinery;
- Inherent permanent land improvements; and
- Infrastructure, such as roads, power lines, water systems, railroad spurs, communication facilities, sewers, sidewalks or cable and wiring.
Special rules apply to tangible personal property and ancillary services. See Internal Revenue Notice 2005-14 for details or give us a call.
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