John Bullis: Qualified production activities deduction is for many taxpayers
November 27, 2012
For the past few years, there has been a special income tax deduction called the Qualified Production Activities Deduction.
It is an expense against business income unless the business is being taxed as an S corporation or a Partnership, in which case the information for the deduction on the owner’s individual return is found on Schedule K-1. (Each shareholder or partner computes the deduction on form 8903 and claims it on the first page of their individual income tax return).
Like most tax laws on special benefits, it is complicated. But the main item to remember is it applies to many taxpayers you might not think of as manufacturers.
It applies to construction of real property in the USA; Engineering and architectural services done in USA for construction of real property in USA; Property manufactured, produced, grown or extracted in whole or in a significant part in USA; Films produced and production of electricity, natural gas or potable water in USA.
Basically, the deduction is figured by taking the gross receipts from qualified activities reduced by the cost of goods sold (direct expenses). Then multiplying the result by 9 percent for 2011. The deduction is limited to 50 percent of wages paid directly attributable to production.
We were preparing an individual return for a new client who has an S corporation that is involved in construction of real estate. The prior returns did not claim the QPAD deduction so we are doing amended returns for 2009 and 2010 to get refunds.
The 2009 return would have a filing date of April 15, 2010. The normal three year statute of limitations means the 2009 amended return needs to be filed by April 15, 2013.
The definitions of who qualifies for this deduction include many taxpayers who might not realize they are entitled to this deduction (if they have profits).
You can go to the IRS website (irs.gov) and print out the form 8903 and the instructions to see if you or someone you know might look at this.
Congress is talking about extending this deduction for the future, to encourage many business activities and employment. The deduction might even be increased in the future.
The deduction was done partly to offset the high income tax rate on regular “C” corporations. As you know, most other countries have much lower tax rates for those corporations.
Did you hear? “The successful people are the ones who can think up stuff for the rest of the world to keep busy at.” By Don Marquis.
• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.