Domestic Production Activity Deduction

[Bird Legs]

Client owns a moulding shop. Has employees and payroll. The only thing that is done
in the shop is the making of moulding for builders. The builders pick up the finished
moulding and installs it themselves.
Does this qualify my client, that makes the moulding, for the Domestic Production
Activities Deduction? Form 8903?
Thanks.

[jainen]

No

No. The molding belongs to the builders, so they get the deduction for producing it.

[Bird Legs]

Castor Oil

Jainen, your response was like taking a big dose of Castor Oil. It tastes lousy going in
but everything comes out all right in the end.
Thanks

[OldJack]

No. The molding belongs to the builders, so they get the deduction for producing it.

Well... maybe yes. The IRS issued a notice on January 19, 2005, and stated "what constitutes a qualified production activity?". Item one was "The manufacture, production, growth, or extraction in whole or significant part in the United States of tangible personal property (e.g., clothing, goods, and food), software development, or music recordings;.....

They go on in the notice.. "Is a contract manufacturer eligible for the deduction? If one taxpayer performs manufacturing activities for another taxpayer, only the taxpayer with the benefits and burdens of ownership of the tangible personal property during the manufacturing process will be treated as the manufacturer."

As the client in the case is manufacturing the product it would appear to me that the client would get the DPA deduction.

[Black Bart]

Bird,

Castor Oil with a milk chaser.

[Bird Legs]

Milk Chaser?

Mine was orange juice. I was 26 years old before I could drink O.J.

[Bird Legs]

Old Jack-Maybe I

need to do a little more reading on this.
Thanks for your response.

[Black Bart]

No, I mean

Mine was orange juice. I was 26 years old before I could drink O.J.

jainen's reply was the castor oil and Old Jack's was the chaser.

[Black Bart]

Say jainen,

Why wouldn't the guys that built it get the credit instead of the guys that bought it?
Thanks.

[jainen]

Suppose

>>Why wouldn't the guys that built it get the credit instead of the guys that bought it?<<

Suppose a different builder came in and said, "I really need some molding--I'll pay you twice your normal rate." Can the shop say, "Oh good, take these ones that are already made"? No, because those are already spoken for.

Suppose the first builder stops in and says, "We just found out all our clients want antique molding, so we aren't going to pay for this stuff we ordered." Can the shop say, "Sorry, we already filled your order, and you have to honor the contract." Yes, because the builder, not the shop has the risks and benefits of ownership.

Suppose the shop decides there's a big market for molding, and decides to carry the most popular ones as a regular stock item. Then they can claim the production.

[Black Bart]

Yeah, but

They go on in the notice...

only the taxpayer with the benefits and burdens of ownership of the tangible personal property during the manufacturing process will be treated as the manufacturer."

if Old Jack's quote ("during the manufacturing process") is the gospel, then wouldn't the shop be the people with that (ownership) burden?

[OldJack]

Suppose a different builder came in and said, "I really need some molding--I'll pay you twice your normal rate." Can the shop say, "Oh good, take these ones that are already made"? No, because those are already spoken for.

Assuming the builder doesn't own the raw materials... how does the builder think he owns the product simply because he has placed an order or has a contract for products? Doesn't legal ownership per the UCC still change at the point of shipment or did that law change?

[jainen]

legal title

>>legal ownership per the UCC<<

The issue isn't legal title. It's "the benefits and burdens of ownership" (as quoted in your own post). On contract work, the shop can't sell it to highest bidder or paint it pink. And it isn't stuck with the overstock if the market suddenly collapses. The builder is the one who can do what he wants with it, and if he can't find a buyer that's the builder's problem.

[Bird Legs]

Additional Info

My client does not buy the materials. His customers buy the material, brings it to
my client, my client then makes the moulding from that and the customer then picks
up the moulding and pays my client for his labor.
If there is a goof up and my client ruins the material, then my client has to replace it
at his cost, no additional cost to his customer.
Did I explain this all right? Everyone understands what I said?
Thanks.

[OldJack]

The issue isn't legal title. It's "the benefits and burdens of ownership" (as quoted in your own post). On contract work, the shop can't sell it to highest bidder or paint it pink. And it isn't stuck with the overstock if the market suddenly collapses. The builder is the one who can do what he wants with it, and if he can't find a buyer that's the builder's problem.

As long as the raw materials belong to the manufacturer he has the burden of ownership in case of fire or loss and can claim the manufacturer's deduction. Having an order contract does not pass the burden of ownership.

Unless the job manufacturer has sold specific raw materials by the contract or received partial pay for specific materials, the manufacturer can indeed sell any and all his current product to anyone he so wishes and any price he wishes. If the manufacturer wishes he can say to "hell" with the contract and ignore the contract letting the customer sue as the customer does not own the product until the manufacturer says so by shipping.