S.E.C. Real Estate Observer

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Perhaps your accountant has already informed you of the new tax break that applies to those of us in the building business.

Starting in January 2005, there is a 3%-of-income deduction for qualifying businesses. You should ask your accountant to look into the new section 199 of the tax code. A little research will allow you to maximize your tax deduction. As an added plus, this tax deduction will increase to 9% effective in 2010 and initially result in top tax rate of 32% (instead of the 35%) for eligible businesses.

The new tax break is referred to as a manufacturer’s deduction. The term is not limited to traditional manufacturers. It also applies to businesses that engage in any of the following activities: construction in the United States, including related architectural and engineering services. Construction includes both erection and substantial renovation of residential and commercial buildings. It does not apply to cosmetics, such as painting etc.

The deduction is 3% of income from domestic production (building) activities. Income means gross receipts from qualifying activity, reduced by the cost of goods sold and related expenses. Related expenses include direct costs of production, plus a portion of the indirect expenses, but is subject to two limitations…..it cannot exceed taxable income for C corporations, or adjusted gross income for sole proprietors and owners of partnerships, limited liability companies, and S corporations.

For pass through entities, such as S corporations and LLC’s, the deduction is applied at the owner (not the entity) level. This means that the business must allocate income and expenses from production (building) activities so that they can claim the deduction on their personal returns.

The deduction applies to both regular and alternative minimum tax (AMT) purposes for corporations and individuals, so claiming it will not trigger or increase the AMT liability.

While the deduction can first be claimed in 2005 and filed in 2006 don’t wait until the end of the year to start planning. You should probably review your 2004 return with your accountant and perhaps modify or change your accounting methods to best take advantage of this tax break.