Kelly J. Bullis: Sec 199 – A gift for the construction business
Ask anybody in town what the hardest hit industry in this current recession is, and construction is usually the first word out of their mouths. The trickle-down effect is staggering. It has impacted real estate professionals, lending institutions, home improvement retail outlets, government inspectors, manufacturers of home-related products, etc.
There’s an old saying, “When life deals out lemons, you’ve got to learn to make lemonade.” There is a special deduction (reduces taxable income) that goes into full effect in 2010. It’s called the Domestic Production Activities Deduction, IRC Sec. 199.
Who qualifies? Individuals, C corporations, farming cooperatives, estates/trusts and their beneficiaries, and partners/owners of pass-through entities (such as S corporations, LLCs, and partnerships). To qualify, they must be engaged in qualified production-related activities.
The main target is manufacturing. Manufacturing or producing components used by another party in later manufacturing/production activities are eligible activities, as are manufacturing or producing finished items from components manufactured or produced by others. Processing and preparation of food products for sale at wholesale is an eligible production activity. Preparation of food and beverages for sale at retail is not qualified.
“But Kelly,” you say, “you said this was a gift to the construction related businesses.”
That I did! This deduction is also available for anybody engaged in the business of construction of real property in the U.S. (residential or commercial buildings, permanent land improvements, oil/gas wells, platforms and pipelines, and infrastructure.) Examples include residential remodelers (as long as it is substantial renovation not just decoration); commercial and institutional building construction contractors; foundation, structure and building exterior contractors; structural steel and precast concrete contractors; and electrical, plumbing, heating and air-conditioning contractors. (It does not include tangential services such as hauling trash, delivering materials.)
Also included, engineering and architecture services if they are performed in the U.S. for real property construction projects. Includes consultation, investigation, evaluation, planning, design and supervision of construction.
Almost everybody happy yet?
To compute the deduction is not that simple. You should seek the help of a tax professional. Here are the highlights: Calculate the gross margin (some special rules on what is included that I don’t have room to explain here) and taxable income (only used in certain circumstances) on qualified production related activity. Using the smaller of the gross margin or taxable income, you multiply that by 6 percent (if 2009 return) or 9 percent for 2010 and thereafter. There’s a catch. (When dealing with laws written by Congress there’s almost always a catch.) This deduction is limited to 50 percent of the W-2 gross wages directly related to the production activities.
Ahh! Now don’t you feel better? Sit back and enjoy your “lemonade”.
• Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459.