Section 199 - The Domestic Production Activities Deduction; National Grant Thornton Experts...

CHICAGO -- The Treasury Department and Internal Revenue Service recently issued proposed regulations concerning the calculation of the deduction under Internal Revenue Code Section 199 - The Domestic Production Activities Deduction, the centerpiece tax benefit of the American Jobs Creation Act

--  manufacture, production, growth or extraction in the U.S. of

        --  tangible personal property,

        --  computer software or

        --  sound recordings or qualified films;

    --  production of electricity, natural gas or potable water in the
        U.S; and

    --  construction services including related engineering and
        architectural services performed in the U.S.

These proposed regulations provide important detailed guidance beyond that already provided in Notice 2005-14. Included in the proposed regulations is guidance that:

--  Confirms the use of a vertically integrated expanded
        affiliated group to increase the deduction;

    --  Expands the definition of qualified production property to
        allow domestically produced components to qualify, even if
        included in property that does not;

    --  Clarifies when the value of embedded services such as
        warranties and installation must be excluded;

    --  Explains the calculation of the deduction by pass-through
        entities and affiliated groups;

    --  Clarifies the calculation of the deduction in the case of
        construction activities.

These new proposed regulations provide a complex set of rules that draw upon concepts from a variety of income sourcing and cost allocation provisions to arrive at the amount of the deduction. The deduction is effective for taxable years beginning after Dec. 31, 2004, and may provide a deduction of 3 percent of qualified production activities income for 2005, increasing to 9 percent in 2010. Companies and executives need to be prepared to address important questions related to this deduction, such as:

- Which gross receipts qualify?

    - How are cost of goods and other deductions allocated?

    - How does an affiliated group compute the deduction?

    - How are the W-2 wage and taxable income limitations computed?

Federal and international tax experts from Grant Thornton's National Tax Office will discuss the opportunities and complexities involved in determining the deduction in light of the new regulations during a public webcast on Tuesday, November 15. For more information about the webcast or to register, go to www.GrantThornton.com/taxwebcasts.

Please contact Kristi Grgeta at 312-602-8720 or kristi.grgeta@gt.com to arrange an interview to discuss the domestic production activities deduction with one of Grant Thornton's national experts:

--  David Auclair, Tax Accounting Principal,

    --  Mel Schwarz, Tax Legislative Affairs Partner, or

    --  Maureen Kerrigan, Accounting Methods Tax Manager.