Implementing the Production Incentive Under the Proposed Regulations
Robert Feinschreiber, attorney and counselor
Margaret Kent, attorney and counselor
ProductionIncentive.com

The section 199 production incentive enables the taxpayer to deduct additional production amounts, i.e., amounts that are over and above deductions that the taxpayer could otherwise claim:

• This production amount is 3 percent for taxable years beginning in 2005 and 2006.
• The production amount doubles to 6 percent in the case of taxable years beginning in 2007, 2008, and 2009.
• The production amount then triples to 9 percent for subsequent taxable years.

. The taxable income limitation works in the following manner:

• In the case of business taxpayer, the additional production deduction is the lesser of two amounts - the taxpayer's qualified production activities income for the taxable year or the taxpayer's taxable income for the taxable year. The taxpayer is to determine taxable income before the taxpayer takes into account the production incentive.
• In the case of an individual, the production amount is the lesser of two amounts - the taxpayer's qualified production activities income for the taxable year or the taxpayer's adjusted gross income for the taxable year. The taxpayer is to determine adjusted gross income before the taxpayer takes into account the production incentive.

The production incentive has separate rules for the manufacture, production, growth, or extraction for each of twelve product categories. Each rule has its own limitations, and require a detailed analysis:

• Tangible personal property
• Computer software
• Sound recordings
• Films
• Electricity
• Natural gas
• Potable water
• Construction
• Engineering
• Architectural services
• Agriculture
• Mining and oil exploration