New Section 199 Domestic Production Deduction and How It Applies to the Construction and Real Estate Industry . By Pat Derdenger. History and Background. Passed as part of the American Jobs Creation Act of 2004 and codified at 26 U.S.C. § 199.
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By Pat Derdenger
Most residential and commercial contractors
and subcontractors will qualify for the Domestic
Production Deduction because they will have
income that meets the statutory and regulatory
definitions of DPGR.
In order for a contractor to allocate receipts to
DPGR, the following requirements must be met:
Final regulations define ‘construction’ as the
“erection of real property in the U.S.”
Construction does not include:
Real Property includes:
Real Property Does not Include:
At the time of construction taxpayer must:
Income derived from construction:
Income NOT derived from construction:
Section 199 potentially increases taxpayer
administrative burdens and record-keeping
requirements because it forces allocation
between DPGR and non-DPGR.
The final regulations contain two safe harbors
to reduce these burdens under certain
De minimis rule:
If less than 5% of a taxpayer’s gross receipts
on a construction project are not allocable to
DPGR, all the gross receipts will qualify as
The Land Safe Harbor:
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