Treasury and IRS Issue Guidance on Manufacturing Deduction

On Wednesday, the Treasury Department and IRS issued a Notice to help taxpayers calculate the newly enacted deduction relating to domestic production activities. The Notice provides interim guidance on which taxpayers may rely until regulations are issued.

The deduction relating to domestic production activities was enacted in October 2004 as part of the American Jobs Creation Act. The deduction generally equals three percent of income from domestic production activities for 2005 and, by 2010, nine percent of such income. The activities eligible for the deduction include not only the manufacture of personal property such as clothing, goods, and food, but also software development, film and music production, production of electricity, natural gas, or water, construction, and engineering and architectural services.

The domestic production activities deduction provides a tax savings on profits from production activities in the United States. The deduction is a portion of the taxpayer's profits from domestic production and increases proportionally as those profits increase.

"The Notice provides comprehensive rules and definitions to assist taxpayers in implementing this new provision," said Eric Solomon, Treasury's Acting Deputy Assistant Secretary for Tax Policy. "The Treasury Department and IRS anticipate that forthcoming proposed regulations will incorporate the rules set forth in the Notice. We request comments on the rules in the Notice and on any additional guidance that should be provided in the proposed regulations."

"This provision has widespread impact across our complex economy" said IRS Commissioner Mark W. Everson. "The guidance strikes a balance. It provides clear practical guidelines that are administrable both from the taxpayers' and the IRS' point of view."

A fact sheet providing further information on the Notice as well as a copy of the Notice are attached.

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