Domestic Production Activities Deduction Section 199 deductions can provide significant tax benefits. As a part of the newly passed American Jobs Creation Act, these benefits are very new and often require detailed calculations and analyses to obtain. Taxpayers who produce goods, develop software or construct property in the U.S., regardless of whether they are exported, are eligible. This deduction is projected to save taxpayers $76 billion dollars over a ten-year period. How does the deduction work and what production activities qualify? The permanent deduction is equal to a percentage of either the taxable income or the net income (whichever is smaller) that is earned from qualified production activities. Beginning with tax years starting after December 31, 2004, the deduction will proceed as follows:
Qualified domestic production activities include:
How is the Qualified Production Activities Income calculated? Domestic Production Gross Receipts minus expenses determines the Qualified Production Activities Income (QPAI). Expenses include the cost of goods sold allocable to the receipts, allocable direct and indirect costs, and a ratable portion of other costs. There are a number of requirements to consider when calculating and maximizing the Section 199 Deduction including:
Our Approach Our team will apply their expertise in these areas to model, calculate, document and support your Section 199 Deduction. TPG uses a phased approach to achieve results, working with our clients to fully grasp their business and analyze/model all sources of revenue. Using our unique skills, the TPG team will determine the appropriate detailed expense allocations to maximize the resulting tax benefit for each entity.
When a Company’s Ownership Changes, Utilization Tax NOLs and Credits May be Limited There may be adverse unexpected consequences for a company as its ownership changes. Its future ability to utilize unused tax net operating loss (NOL) and tax credit carry-forward amounts may be subject to limitation. A company often issues its own stock for acquisition purposes, uses stock to compensate executives, or issues stock in various public and private new stock offerings. These transactions single-handedly or on a cumulative basis, may cause an adverse “ownership change” and limit the company’s future ability to utilize tax NOL carry-forward amounts. Section 382 Study Tax Projects Group specializes in performing Section 382 Studies. Our Section 382 Study allows a company to properly identify available tax and financial statement benefits as well as plan effectively for the future. Our Section 382 Studies include delivery of the “Section 382 Report.” This report applies the complex rules of IRC Sections 382 and 383, optimizes the use of carry-forwards, analyzes the changes in stock ownership, and assists in determining supporting FAS 109 documentation. The Tax Projects Group can assist companies facing ownership changes and issues affecting utilization of tax attributes.
State governments often look to sales and use taxes when experiencing difficulty generating sufficient revenue to meet budgets and fund operations. The unpopular political decision to raise tax rates encourages legislators to narrow the tax gap by aggressively enforcing compliance through expanding audit presence.
Meal & Entertainment (M&E) Studies The 50% disallowance of the deduction for M&E expenditures often represents a significant recurring permanent increase in taxable income. Often, companies inadvertently subject fully deductible M&E accounts to the 50% disallowance, causing a significant increase in taxable income. The Tax Projects Group M&E Study is designed to quickly understand a company’s policies and procedures for M&E tax accounting. Utilizing acceptable statistical sampling methods, we look to calculate and document at the correct amount of non-deductible M&E in the current and prior tax periods. The benefits achieved may include considerable refunds of prior years’ taxes and ongoing permanent tax savings, and improvements in a firm's processes and procedures to appropriately segregate fully deductible expenditures from otherwise partially deductible meals and entertainment costs. Below are the expenses we look to segregate out and often find should be deductible to our clients: Certain expenses relating to recreational or social or similar activities primarily for employee benefit. De minimus Fringe Benefits that are excludible from an employee’s gross income:
Items miscoded as M&E - Several types of expenses are generally found in M&E expenses which should not be classified as M&E expenses.
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