199 credit Experts?

[BulldogTom]

I am not an expert on Production Activities Credit. I am going to do some research on this, but I thought I would ask for some direction before I get into it.

Situation: Corp has a profit of 300K. Has several divisions for managerial reporting purposes, but reports all activities on one return for tax purposes. The activities that give rise to the credit are in a division that posted a loss. Approximately 10% of the activities of the company as a whole would qualify for the credit. Approximately 30% of the activities of the division in question are qualifying activities. Overhead costs are the reason for the loss in the division in question.

Question: Does the corporation have to have a profit on the division where the activities took place to claim the credit? In other words, does the company need to segregate and show a profit on the qualifying activities?

Sorry if this is a basic question, I just don't deal with this credit enough to know what I don't know.

Thanks for your input.

Tom

Lodi, CA

[Gail in Virginia]

I am not an expert on Production Activities Credit. I am going to do some research on this, but I thought I would ask for some direction before I get into it.

Situation: Corp has a profit of 300K. Has several divisions for managerial reporting purposes, but reports all activities on one return for tax purposes. The activities that give rise to the credit are in a division that posted a loss. Approximately 10% of the activities of the company as a whole would qualify for the credit. Approximately 30% of the activities of the division in question are qualifying activities. Overhead costs are the reason for the loss in the division in question.

Question: Does the corporation have to have a profit on the division where the activities took place to claim the credit? In other words, does the company need to segregate and show a profit on the qualifying activities?

Sorry if this is a basic question, I just don't deal with this credit enough to know what I don't know.

Thanks for your input.

Tom

Lodi, CA

Tom, I should never shoot from the hip like this (I did not even look at the form to refresh my memory) but if memory serves, the form calls for the qualifying income, followed by subtractions for expenses related to the qualifying income. Now if you can make the case that the overhead that causes the loss is not an expense against the qualifying income, you might be all right BUT you do have to do a certain amount of segregating the profit to relate to the qualifying activities.

Don't know if this helps at all, and I certainly don't recommend that you rely on it.

[BulldogTom]

Tom, I should never shoot from the hip like this (I did not even look at the form to refresh my memory) but if memory serves, the form calls for the qualifying income, followed by subtractions for expenses related to the qualifying income. Now if you can make the case that the overhead that causes the loss is not an expense against the qualifying income, you might be all right BUT you do have to do a certain amount of segregating the profit to relate to the qualifying activities.

Don't know if this helps at all, and I certainly don't recommend that you rely on it.

Thanks Gail,

Actually, I started looking at this by getting the instructions for form 8903, and there "might" be a way to make this work. There is a simplified deduction method that I may be able to apply to the qualified production activities income. There is a general rule about allocations of cogs and other income and expense that I may be able to use to my advantage. I need to get into the code and regs to see if the IRS instructions are too basic for this situation.

I am still looking deeper, and would appreciate any other comments.

Tom

Lodi, CA

[kcjenkins]

Tom, this section is so new and so complex that what you are doing is really 'the only way to fly', so to speak. There really is not much to go by so far, other than just reading the code itself.

[TAXBILLY]

http://www.irs.gov/irb/2005-07_IRB/ar08.html

taxbilly

[BulldogTom]

http://www.irs.gov/irb/2005-07_IRB/ar08.html

taxbilly

Thanks Billy, that was a real help.

Tom

Lodi, CA

[TAXBILLY]

You're welcome.

taxbilly

[BulldogTom]

Just a follow up, after about an hour of working on it, I found that there was not enough profits on those activities to get a deduction.

It is interesting that there are three levels of computations depending on the size of the company. I was unable to use the easiest method because the company was too big. The client was able to use the second method, but it resulted in no deduction. Did not have to go to the most complicated method.

Pretty cool to learn something new. Not sure how much I will need this in the future, but I can say I know something about it now.

Thanks again to Taxbilly for his help.

Tom

Lodi, CA