Robison Law Firm

Recently-issued proposed tax regulations under tax Code Section[Sec. 199] provides homebuilders and developers with an unexpectedly generous method for calculating their production activities deduction. They may use a low deemed profit markup rather than their real appreciation in excluding gain on land from the gain on their constructed property. This will increase their deduction in many cases. Hey! Can I become a developer?

The only penalty for you in these new deductions will be trying to understand the wildly complex Code Section to provide a new deductions for your clients to offset income from manufacturing and other production activities [while putting together your son's new bicycle before December 25. Don't let this newsletter fall into toddler's hands]

For 2005, the Code Sec. 199 production deduction equals 3% of the lesser of:

• the taxpayer's qualified production activities income or
• total taxable income (adjusted gross income, in the case of a sole proprietor) for the year.

The deduction is limited to 50% of the W-2 wages paid by the taxpayer. (Code Sec. 199(a), Code Sec. 199(b)) Qualified production activities income is domestic production gross receipts-which includes construction activities performed in the U.S.-with certain reductions. (Code Sec. 199(c)(4))

The safe harbor rule will save many homebuilders and developers who need to compute qualified production activities income from having to get appraisals when they sell improved real estate. In addition, because the 5%, 10% or 15% deemed gain in the proposed reliance regs is likely to be much less than the actual gain that would be attributable to the sale of the land if an appraisal was used, the safe harbor will generally increase a taxpayer's Code Sec. 199 deduction. The lower the amount of receipts attributed to the sale of land on a sale of improved real estate, the higher the amount of domestic production gross receipts qualifying for the deduction.