IRS Gives Deduction Guidance

March 4, 2005 - 13:45

A recent article in SAF’s Washington Week in Review stated that according to the Internal Revenue Service (IRS), “A new deduction will give floral industry growers and manufacturers significantly increasing tax breaks over the next four years.”
Last October, President Bush signed the “American Jobs Creation Act,” one of the most complete revisions of the tax-code since 1986. Part of this new bill, called the “manufacturing deduction” is available to most growers and manufacturers in the floral-industry, according to the Washington Week in Review.

The following are the summarized provisions that SAF was able to obtain from the IRS.

  • Beginning in 2005, 3 percent of the lesser of “Qualified Production Activities Income” (QPAI) or taxable income, for the taxable year, is deductible. In 2006 the deduction will be 6 percent. In 2009, the full 9 percent deduction will phase in.

  • QPAI is defined as “the manufacture, production, growth or extrication in whole or significant part” in the United States of tangible personal property, including agricultural production. Manufacture of other real property, software, production of electricity, natural gas or water, construction and engineering and architectural services are also included.

  • QPAI is calculated by subtracting associated Costs of Goods Sold (COGS) from Domestic Production Gross Receipts.
  • IRS has three methods for calculating COGS. For businesses with gross receipts of $25 million or less annually, a simplified method applies. Businesses with gross receipts of $5 million or less, or those that are eligible to use cash accounting, may use a simpler method and may allocate all costs on a ratio of domestic receipts to gross receipts.

  • Intellectual property other than software does not qualify for the deduction. However, a patent used in the growing or manufacturing process (as opposed as a patent sold) would qualify.

  • A separate tax form will not be required for 2005; the deduction will be taken as a line item on the regular tax form.

Contact tax advisors immediately for advice on how this could impact 2005 taxes.

For more information on this subject contact Lin Schmale at SAF at (800) 336-4743 or lschmale@safnow.org. You can also visit www.treasury.gov to find the press release, though the press release may not specifically mention the floral industry, GPN Weekly has spoken to Lin Schmale, and she assured us that she attended a briefing from the IRS Deputy Chief Counsel and the Associate Chief Counsel herself and heard first hand that this new bill does indeed apply to our industry.

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