Latest Tax Law Raises Deductions

President Bush signed into law H.R. 4520, the American Jobs Creation Act, on Oct. 22. The law provides the equivalent of a 3% tax cut for taxpayers engaged in production in the U.S. The provision achieves this by reducing the amount of taxable income with a new deduction, not by lowering the tax rate. The deduction is not limited to traditional manufacturers and is available to taxpayers regardless of how their business is organized for tax purposes.

Under previous law, there is no provision in the tax code that permits taxpayers to claim a deduction from taxable income attributable to domestic production activities, other than allowable deductions of costs incurred to produce such income.

The new law provides a deduction from taxable income or adjusted gross income—in the case of an individual—for a portion of the taxpayer's qualified production activities income.

For taxable years beginning in 2005 and 2006, the deduction is 3% of income, and beginning in 2007, 2008 and 2009, the deduction is 6%. After 2009, the deduction is 9%. However, the deduction is limited to 50% of the wages paid by the taxpayer during the calendar year.

There are numerous provisions in the over 600-page law, which includes energy-related tax credits, itemized deduction of state and local sales taxes, reform of tobacco subsidies and international tax, and simplification provisions.