Tax Deduction For Small Business May Be Overlooked

 

Small Businesses Owners Missing Major Tax Deduction

Many small businesses owners are missing out of a deduction worth thousands because their tax preparers have not familiarized themselves the Domestic Productions Activities Deduction.

Littleton, CO (PRWEB) April 6, 2006 -- Many small businesses owners are paying too much in taxes this year because their accountants and tax preparers have not familiarized themselves with the Domestic Productions Activities Deduction.

Shortly before Election Day 2004, President Bush signed the American Jobs Creation Act of 2004 (108 Public Law 357) (AJCA). This colossal tax bill contained over 170 provisions spread out over 300 pages. PricewaterhouseCoopers, LLP, said that the AJCA contained the most sweeping business tax changes since the Tax Reform Act of 1986 and estimated that the new law will provide nearly $137 billion in tax relief over the next 10 years.

The AJCA repealed the Foreign Sales Corporation and contained Extraterritorial Taxable Income provisions required to settle a dispute with European trading partners in the WTO that was leading to escalating tariffs on US exports. However, the provisions most important to small businesses in the US are those creating the new section 199 of the Internal Revenue Code covering the Domestic Productions Activities Deduction (DPAD).

The passage of the law was only the beginning of its implementation. On February 14, 2005 The Internal Revenue Service issued its initial guidance on the DPAD in the form of Notice 2005-14 (Internal Revenue Bulletin 2005-7) which runs 49 pages. Section 403 of the Gulf Opportunity Zone Act of 2005 (a mere 14 pages) passed very late in 2005 added several technical corrections to IRC 199. On November 21, 2005 the IRS issued its “Notice of Proposed Rulemaking” (REG-105847-05) 2005-47 IRB p. 987 which totals 62 pages, included the proposed rules. The final rules will be issued later in 2006.

“The volume of paper to read is challenging enough and making any sense out of it is another hurdle. It is very complex,” said attorney Darlene Cypser.

The IRS itself was finding it a challenge to deal with. The form used to apply for the DPAD, Form 8903, and its instructions, were not available from the IRS’s website until late February of this year.

DPAD is a deduction of 3% in tax years 2005 & 2006 (6% in 2007, 2008 & 2009) of the “Qualified Domestic Production Activities Income” (QPAI) from “Qualified Production Property” (QPP). QPP is defined as any tangible personal property, any computer software, and certain sound recordings, that is manufactured, produced, grown or extracted (MFGE) in the United States. A separate section also includes qualified films.

Unfortunately many accountants and tax preparers seem to be unaware of the DPAD’s broad sweep. “It is quite possible that they are boggled by the shear intensity of the acronym slinging in the law and applicable regulations,” Cypser said. “In a fit humor I realized the entire thing could be condensed to one sentence of acronyms: ‘The DPAD is 3% of the QPAI which is the DPGR minus CGS allocated to SELL of QPP or QF MPGE by a taxpayer.’ The challenge is translating that to something you can apply to your tax return.”

Many accountants and tax preparers who primarily deal in small clients have dismissed the new DAPD as only applying to large manufacturing companies and have failed to examine the law in depth.

“It applies not only to large manufacturing businesses, but to software companies, record companies, movie production companies, publishers, farmers, miners, and just about anyone else who creates any product for sale,” Cypser said

But despite the challenges in understanding and applying for the DPAD, it is worthwhile for owners of small businesses to ask their accountants and tax preparers to look into it.

“Most self-employed people are going to be stopped by the W-2 wage limitation,” Cypser said, “but any business that produces and sells products, has employees, and has a positive net income for the tax year has the potential for a deduction of thousands or tens of thousands of dollars.”

And should be enough to cover their accountant’s bill, at the very least.

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