Is Your Company Leaving Tax Deductions on the Table?

If your company participates in a manufacturing or production process, you might be leaving money in the table

There is a deduction for the sale, lease/rental or license of production activities, officially called the “domestic production activities deduction”.  It is also called the “Section 199” or “DPAD”.  The deduction is the lesser of 9% of net qualified production activities income, 9% of taxable income or 50% of W-2 wages paid by the company to domestic production employees.  The deduction cannot reduce net income below zero, but it can be used against the AMT.  However many states including California, New York and Oregon do not allow the deduction.

The deduction is limited to production activities in the US and is available for the following:

(1)  Oil & gas production

(2)  Agricultural processing (i.e. farmers) including cooperatives

(3)  Manufacturers

(4)  Construction

(5)  Engineering

(6)  Architecture

(7)  Computer software production

(8)  Motion picture production

(9)  Music production

The following example was used in a Congressional hearing defines what is and is not a qualified domestic production activity:  “Suppose you are a baker and in the business of producing donuts. Some of the donuts you sell retail directly to the consumers, and some you sell in bulk to hotels and restaurants. The production costs of the donuts sold at retail do not qualify for the deduction, while the costs associated with the wholesale sales to the hotels and restaurants do”.

The deduction is not limited to just the manufacture or producer, but is also available to companies who outsource the manufacturing or production.  However only one company can take the deduction.  In this case, things can get a bit complicated for the company that takes the deduction and must provide documented proof of the following:

(1)  A statement that explains the basis for the taxpayer's determination that it had the benefits and burdens of ownership in the year or years under examination

(2)  A certification statement, using an IRS form, signed by both companies

If you have already taken this deduction or thinking you should, be warned this is an area the IRS loves to audit.

Please call this office if you wish more information

 

 

CONGRESS OKs EXTEND CLOSING DATE FOR HOMEBUYER CREDIT

On June 30, Congress passed H.R. 5623, the Homebuyer Assistance Improvement Act of 2010. The Act, which is now cleared for the President’s signature, provides first-time homebuyer credit relief to taxpayers who couldn’t meet a key June 30, 2010, closing date.

Under prior law, both the regular Code 36 first-time homebuyer credit of $8,000 and the reduced credit of $6,500 for long-term residents generally expired for homes purchased after Apr. 30, 2010. However, if a written binding contract to purchase a principal residence was entered into before May 1, 2010, the credit could be claimed if the purchase closed before July 1, 2010.

The Act amends Code Sec. 36(h)(2) to provide that if a written binding contract to purchase a principal residence was entered into before May 1, 2010, the credit may be claimed if the purchase is closed before Oct. 1, 2010. Thus, this extension allows homebuyers who signed a contract no later than the April 30th deadline to complete their closing by the end of September.

The three-month extension of the closing date provides tax relief for those who couldn't close on time because of backlogs at lenders and federal programs involved in homebuyer loans. In the words of the Act’s supporters, the three-month extension “will give time for all the new mortgages to be processed and not punish those homeowners who have been delayed through no fault of their own.”

The cost of the three-month closing reprieve is fully offset with revenue raisers, including these tax changes: expanding the bad check penalty under Code Sec. 6657 to cover electronic payments, effective for instruments tendered after the enactment date; and providing for disclosure of prisoner return information under Code Sec. 6103(k)(10) to state prisons, effective for disclosures after the enactment date.

© 2010 Thomson Reuters/RIA. All rights reserved.

2009 Tax Strategy VI – Deductable Taxes

This is my sixth posting of a daily tax tip. This is about Tax Deductions

Generally, the following taxes are deductable:
(1) State and local income tax [Includes the California SDI]
(2) Real Property Tax
(3) Personal Property Tax
(4) Foreign Tax Paid
(5) The larger of
(a) State and Local Income Tax paid
(b) Sales tax paid
(6) If 4(b) is not used, sales or excise tax paid on the purchase of a new vehicle

To deduct the above taxes, two general tests must be meet
(1) The tax must be imposed on the Taxpayer (except where local law does not specify on whom the tax is imposed).
(2) The tax must be paid during the year.

In the case of sales tax, either the Taxpayer can deduct the actual amount paid during the year or use an IRS income based schedule. If the Taxpayer decides to deduct actual tax paid, they must have all receipts to support the deduction. Generally, Taxpayers have not kept all of their receipts, so using the IRS table is recommended

For the sales tax on new vehicles, there are additional requirements.
(1) This includes tax on cars and motorcycles
(2) The maximum cost of the vehicle cannot exceed $49,500.

For property taxes, if the Taxpayer does not itemize deductions, an additional amount can be added to the standard deduction, but no more than $500 for single Taxpayers and $1,000 for Married filling Joint Taxpayers.

It is important to understand that under the Tax Benefit Rule, the amount deducted or credited for income tax in an earlier tax year needs to be included in income in the current year. However, if the Taxpayer chooses to deduct sales tax instead of stat income tax and receive a state refund for that year that refund is not 100% taxable. The amount of refund includable in income is limited to the excess of the income tax the taxpayer chose to deduct over the sales tax they did not choose to deduct.

Example 1 – Assume in 2008 the Taxpayer chooses an $11,000 state income tax deduction over a $10,000 sales tax deduction. Since the state income tax deduction is the largest, he chooses to deduct the state income tax. In 2009, he receives a $2,500 state income tax refund. According to the Tax Benefit Rule by deducting the $11,000 state income tax was only $1,000 more than, if the $10,000 sales tax deduction was used. Thus, only $1,000 of the $2,500 refund is taxable.

Example 2 - If in the above example the facts are reversed, the Taxpayer chooses an $11,000 sales tax deduction over a $10,000 state income tax deduction. In this case, none of the income tax refund is deductable