Sec' 199 Deduction

1
Sec. 199 Deduction

• Domestic Production Activities Deduction

2
Basic Description

• Deduction is statutory percentage of lesser of,
• Qualified Production Activities Income (QPAI),
  and
• Taxpayers taxable income for year, or AGI in
  case of individuals,
• Deduction may not exceed W-2 wages paid to
  generate domestic production gross receipts
  (DPGR)

3
Statutory Percentage

• 2005 2006 3
• 2007, 2008 2009 6
• 2010 and thereafter 9

4
Sale of Cut Products

• Primary beneficiaries of DPAD are producers of
  products derived from timber
• Logs
• Lumber
• Finished products
• Revenue of loggers
• Qualify if take title to timber and sell logs
• Dont qualify if provide logging services
• May be an issue if they have only a contract
  right to cut

5
Gains from Disposal of Standing Timber

• Gains from disposals of real property dont
  qualify as DPGR
• IRS has indicated that a states statutory
  definition of real property is not binding on IRS
• A disposal of timber on the stump is a disposal
  of real property

6
Gains from Disposal of Standing Timber

• An election under 631(a) can be revoked in order
  to qualify revenue from sale of cut products as
  DPGR

7
Recovery of Basis in Timber

• Depletion allowance must be treated as a cost of
  goods sold or other deduction in determining
  QPAI.