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 • Taxpayer’s 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) W L Hoover, Purdue University

3. Statutory Percentage • 2005 & 2006 – 3% • 2007, 2008 & 2009 – 6% • 2010 and thereafter – 9% W L Hoover, Purdue University

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 • Don’t qualify if provide logging services • May be an issue if they have only a contract right to cut W L Hoover, Purdue University

5. Gains from Disposal of Standing Timber • Gains from disposals of real property don’t qualify as DPGR • IRS has indicated that a state’s statutory definition of real property is not binding on IRS • A disposal of timber on the stump is a disposal of real property W L Hoover, Purdue University

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 W L Hoover, Purdue University

7. Recovery of Basis in Timber • Depletion allowance must be treated as a cost of goods sold or other deduction in determining QPAI. W L Hoover, Purdue University