New Business Tax Deduction

Starting in 2005, businesses will have a new tax deduction available to them. The Internal Revenue Code Section 199 “production deduction” is equal to 3% of the lesser of (1) the business’s total taxable income or (2) the business’s “qualified production activities income” for the year. The deduction is also limited to 50% of W-2 wages paid during the year. Qualified production activities include manufacturing, production, growth or extraction of qualifying production property by a taxpayer in whole or significantly within the United States. Your tax professional can tell you if your business is a “Qualified Production Activity.”
Because of the W-2 wage limitation, this is the time to be calculating your 2005 deduction. If your wages are too low to take the entire deduction, you may want to make year-end bonuses or take other action to ensure that the entire deduction is available to you. Calculating your deduction now may also affect the estimated tax payment you make for January and other tax planning for 2006. This deduction will remain at 3% for 2006 and gradually increase to 9% after 2009. Give your tax professional a call to see if you qualify for this new deduction.
This tax tip was provided by Kevin C. Boeving, CPA, Poppen & Associates, CPA’s, P.C. For more information on the upcoming tax season, visit www.irs.com.