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The
Domestic Production Activities Deduction was passed into law as part of
the American Jobs Creation Act of 2004. Section 102 of that Act
provides the text for Internal Revenue Code Section 199. I have
reprinted the relevant section of the American Jobs Creation Act of
2004, based on the full text of the Act as found at the Library
of
Congress.
American Jobs Creation Act of 2004
(Enrolled as Agreed to or Passed by Both House and Senate)
SEC. 102. DEDUCTION RELATING TO INCOME ATTRIBUTABLE
TO DOMESTIC PRODUCTION ACTIVITIES.
(a) IN
GENERAL- Part VI of subchapter B of chapter 1 (relating to
itemized deductions for individuals and corporations) is amended by
adding at the end the following new section:
SEC. 199. INCOME ATTRIBUTABLE TO DOMESTIC
PRODUCTION ACTIVITIES.
(a)
ALLOWANCE OF DEDUCTION-
(1)
IN GENERAL- There shall be allowed as a deduction an amount equal
to 9 percent of the lesser of--
(A)
the qualified production activities income of the taxpayer for the
taxable year, or
(B)
taxable income (determined without regard to this section) for the
taxable year.
(2)
PHASEIN- In the case of any taxable year beginning after 2004 and
before 2010, paragraph (1) and subsections (d)(1) and (d)(6) shall be
applied by substituting for the percentage contained therein the
transition percentage determined under the following table:
taxable years beginning in:
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The transition percentage is:
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2005 or 2006
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3
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2007, 2008, or 2009
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6
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(b)
DEDUCTION LIMITED TO WAGES PAID-
(1)
IN GENERAL- The amount of the deduction allowable under subsection
(a) for any taxable year shall not exceed 50 percent of the W-2 wages
of the employer for the taxable year.
(2)
W-2 wages- For purposes of paragraph (1), the term `W-2 wages'
means the sum of the aggregate amounts the taxpayer is required to
include on statements under paragraphs (3) and (8) of section 6051(a)
with respect to employment of employees of the taxpayer during the
calendar year ending during the taxpayer's taxable year.
(3)
ACQUISITIONS AND DISPOSITIONS- The Secretary shall provide for the
application of this subsection in cases where the taxpayer acquires, or
disposes of, the major portion of a trade or business or the major
portion of a separate unit of a trade or business during the taxable
year.
(c)
QUALIFIED PRODUCTION ACTIVITIES INCOME- For purposes of this
section--
(1)
IN GENERAL- The term `qualified production activities income' for
any taxable year means an amount equal to the excess (if any) of--
(A)
the taxpayer's domestic production gross receipts for such taxable
year, over
(i)
the cost of goods sold that are allocable to such receipts,
(ii)
other deductions, expenses, or losses directly allocable to such
receipts, and
(iii)
a ratable portion of other deductions, expenses, and losses that
are not directly allocable to such receipts or another class of income.
(2)
ALLOCATION METHOD- The Secretary shall prescribe rules for the
proper allocation of items of income, deduction, expense, and loss for
purposes of determining income attributable to domestic production
activities.
(3)
SPECIAL RULES FOR DETERMINING COSTS-
(A)
IN GENERAL- For purposes of determining costs under clause (i) of
paragraph (1)(B), any item or service brought into the United States
shall be treated as acquired by purchase, and its cost shall be treated
as not less than its value immediately after it entered the United
States. A similar rule shall apply in determining the adjusted basis of
leased or rented property where the lease or rental gives rise to
domestic production gross receipts.
(B)
EXPORTS FOR FURTHER MANUFACTURE- In the case of any property
described in subparagraph (A) that had been exported by the taxpayer
for further manufacture, the increase in cost or adjusted basis under
subparagraph (A) shall not exceed the difference between the value of
the property when exported and the value of the property when brought
back into the United States after the further manufacture.
(4)
DOMESTIC PRODUCTION GROSS RECEIPTS-
(A)
IN GENERAL- The term `domestic production gross receipts' means
the gross receipts of the taxpayer which are derived from--
(i)
any lease, rental, license, sale, exchange, or other disposition
of--
(I) qualifying production property which was
manufactured, produced, grown, or extracted by the taxpayer in whole or
in significant part within the United States,
(II) any qualified film produced by the taxpayer,
or
(III) electricity, natural gas, or potable water
produced by the taxpayer in the United States,
(ii)
construction performed in the United States, or
(iii)
engineering or architectural services performed in the United
States for construction projects in the United States.
(B)
EXCEPTIONS- Such term shall not include gross receipts of the
taxpayer which are derived from--
(i)
the sale of food and beverages prepared by the taxpayer at a
retail establishment, and
(ii)
the transmission or distribution of electricity, natural gas, or
potable water.
(5)
QUALIFYING PRODUCTION PROPERTY- The term `qualifying production
property' means--
(A)
tangible personal property,
(B)
any computer software, and
(C)
any property described in section 168(f)(4).
(6)
QUALIFIED FILM- The term `qualified film' means any property
described in section 168(f)(3) if not less than 50 percent of the total
compensation relating to the production of such property is
compensation for services performed in the United States by actors,
production personnel, directors, and producers. Such term does not
include property with respect to which records are required to be
maintained under section 2257 of title 18, United States Code.
(A)
IN GENERAL- The term `domestic production gross receipts' shall
not include any gross receipts of the taxpayer derived from property
leased, licensed, or rented by the taxpayer for use by any related
person.
(B)
RELATED PERSON- For purposes of subparagraph (A), a person shall
be treated as related to another person if such persons are treated as
a single employer under subsection (a) or (b) of section 52 or
subsection (m) or (o) of section 414, except that determinations under
subsections (a) and (b) of section 52 shall be made without regard to
section 1563(b).
(d)
DEFINITIONS AND SPECIAL RULES-
(1)
APPLICATION OF SECTION TO PASS-THRU ENTITIES-
(A)
IN GENERAL- In the case of an S corporation, partnership, estate
or trust, or other pass-thru entity--
(i)
subject to the provisions of paragraphs (2) and (3), this section
shall be applied at the shareholder, partner, or similar level, and
(ii)
the Secretary shall prescribe rules for the application of this
section, including rules relating to--
(I) restrictions on the allocation of the
deduction to taxpayers at the partner or similar level, and
(II) additional reporting requirements.
(B)
APPLICATION OF WAGE LIMITATION- Notwithstanding subparagraph
(A)(i), for purposes of applying subsection (b), a shareholder,
partner, or similar person which is allocated qualified production
activities income from an S corporation, partnership, estate, trust, or
other pass-thru entity shall also be treated as having been allocated
W-2 wages from such entity in an amount equal to the lesser of--
(i)
such person's allocable share of such wages (without regard to
this subparagraph), as determined under regulations prescribed by the
Secretary, or
(ii)
2 times 9 percent of the qualified production activities income
allocated to such person for the taxable year.
(2)
APPLICATION TO INDIVIDUALS- In the case of an individual,
subsection (a)(1)(B) shall be applied by substituting `adjusted gross
income' for `taxable income'. For purposes of the preceding sentence,
adjusted gross income shall be determined--
(A)
after application of sections 86, 135, 137, 219, 221, 222, and
469, and
(B)
without regard to this section.
(3)
PATRONS OF AGRICULTURAL AND HORTICULTURAL COOPERATIVES-
(A)
IN GENERAL- If any amount described in paragraph (1) or (3) of
section 1385(a)--
(i)
is received by a person from an organization to which part I of
subchapter T applies which is engaged--
(I) in the manufacturing, production, growth, or
extraction in whole or significant part of any agricultural or
horticultural product, or
(II) in the marketing of agricultural or
horticultural products, and
(ii)
is allocable to the portion of the qualified production
activities income of the organization which, but for this paragraph,
would be deductible under subsection (a) by the organization and is
designated as such by the organization in a written notice mailed to
its patrons during the payment period described in section 1382(d),
then
such person shall be allowed a deduction under subsection (a) with
respect to such amount. The taxable income of the organization shall
not be reduced under section 1382 by reason of any amount to which the
preceding sentence applies.
(B)
SPECIAL RULES- For purposes of applying subparagraph (A), in
determining the qualified production activities income which would be
deductible by the organization under subsection (a)--
(i)
there shall not be taken into account in computing the
organization's taxable income any deduction allowable under subsection
(b) or (c) of section 1382 (relating to patronage dividends, per-unit
retain allocations, and nonpatronage distributions), and
(ii)
in the case of an organization described in subparagraph
(A)(i)(II), the organization shall be treated as having manufactured,
produced, grown, or extracted in whole or significant part any
qualifying production property marketed by the organization which its
patrons have so manufactured, produced, grown, or extracted.
(4)
SPECIAL RULE FOR AFFILIATED GROUPS-
(A)
IN GENERAL- All members of an expanded affiliated group shall be
treated as a single corporation for purposes of this section.
(B)
EXPANDED AFFILIATED GROUP- For purposes of this section, the term
`expanded affiliated group' means an affiliated group as defined in
section 1504(a), determined--
(i)
by substituting `50 percent' for `80 percent' each place it
appears, and
(ii)
without regard to paragraphs (2) and (4) of section 1504(b).
(C)
ALLOCATION OF DEDUCTION- Except as provided in regulations, the
deduction under subsection (a) shall be allocated among the members of
the expanded affiliated group in proportion to each member's respective
amount (if any) of qualified production activities income.
(5)
TRADE OR BUSINESS REQUIREMENT- This section shall be applied by
only taking into account items which are attributable to the actual
conduct of a trade or business.
(6)
COORDINATION WITH MINIMUM TAX- The deduction under this section
shall be allowed for purposes of the tax imposed by section 55; except
that for purposes of section 55, the deduction under subsection (a)
shall be 9 percent of the lesser of--
(A)
qualified production activities income (determined without regard
to part IV of subchapter A), or
(B)
alternative minimum taxable income (determined without regard to
this section) for the taxable year.
In
the case of an individual, subparagraph (B) shall be applied by
substituting `adjusted gross income' for `alternative minimum taxable
income'. For purposes of the preceding sentence, adjusted gross income
shall be determined in the same manner as provided in paragraph (2).
(7)
REGULATIONS- The Secretary shall prescribe such regulations as are
necessary to carry out the purposes of this section.'.
(b)
MINIMUM TAX- Section 56(g)(4)(C) (relating to disallowance of items
not deductible in computing earnings and profits) is amended by adding
at the end the following new clause:
(v)
DEDUCTION FOR DOMESTIC PRODUCTION- Clause (i) shall not apply to
any amount allowable as a deduction under section 199.'.
(c)
SPECIAL RULE RELATING TO ELECTION TO TREAT CUTTING OF TIMBER AS A
SALE OR EXCHANGE- Any election under section 631(a) of the Internal
Revenue Code of 1986 made for a taxable year ending on or before the
date of the enactment of this Act may be revoked by the taxpayer for
any taxable year ending after such date. For purposes of determining
whether such taxpayer may make a further election under such section,
such election (and any revocation under this section) shall not be
taken into account.
(d)
TECHNICAL AMENDMENTS-
(1)
Sections 86(b)(2)(A), 135(c)(4)(A), 137(b)(3)(A), and
219(g)(3)(A)(ii) are each amended by inserting `199,' before `221'.
(2) Clause
(i) of section 221(b)(2)(C) is amended by inserting by
inserting `199,' before `222'.
(3) Clause
(i) of section 222(b)(2)(C) is amended by inserting `199,'
before `911'.
(4)
Paragraph (1) of section 246(b) is amended by inserting `199,'
after `172,'.
(5) Clause
(iii) of section 469(i)(3)(F) is amended by inserting `199,'
before `219,'.
(6)
Subsection (a) of section 613 is amended by inserting `and without
the deduction under section 199' after `without allowances for
depletion'.
(7)
Subsection (a) of section 1402 is amended by striking `and' at the
end of paragraph (14), by striking the period at the end of paragraph
(15) and inserting `, and', and by inserting after paragraph (15) the
following new paragraph:
(16)
the deduction provided by section 199 shall not be allowed.'.
(8) The
table of sections for part VI of subchapter B of chapter 1 is
amended by adding at the end the following new item:
Sec. 199. Income attributable to domestic
production activities.'.
(e)
EFFECTIVE DATE- The amendments made by this section shall apply to
taxable years beginning after December 31, 2004.
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