Form 8903

[Ray]

I am trying to get a little more information on the new Domestic Production Activities Deduction. TheTaxBook has an excellent example but I would like a little more. I went to the IRS web site for 'Forms and Publications' and found nothing.
Does anyone have a good web site for this form detailing the instructions a little more?

Thanks

Ray

[Ray]

8903

To expound a little on the questions I had: TheTaxBook example lists a sole proprietor - would a subchapter S or partnership qualify?

Also the example in TheTaxBook is a person in home construction - would an electrical contractor who does new home electrical work or a framer ect qualify?
i.e. who in the building trade qualify?

Usually the IRS will have instructions with the forms, in this case they don't even have the forms. Do they really go out of their way to make things difficult or is it just second nature to them?

Ray

[Bird Legs]

Production Activity Credit

While on this subject would a restaurant be eligible for this credit? It takes material,
turns it into a finished product for resale.
Bakery?

[Nancy]

IRS Notice 2005-14

See the link to IRS Notice 2005-14 for a good explanation:

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

This link addresses the food and beverage industry:

http://www.irs.gov/irb/2005-47_IRB/ar15.html

[RLymanC]

Ray

Building contractors and sub contractors figure their credit the exact same way based on net profit.

[rosieea]

Leased Employees

Since the deduction is limited by the amount of W-2 wages paid by the taxpayer, can the taxpayer qualify for the deduction if only leased employees are used? I am getting differing opinions from well-informed practitioners. Notice 2005-14 would appear to allow it, provided the taxpayer can be considered the common-law employer, and provided the wage payments are contingent upon the taxpayer first providing the funds to the leasing company. Any opinions?

[JON]

Leased employees

Do you get the W-2 information from the contractor so you can separate the eligible salaries???

[rosieea]

Do you get the W-2 information from the contractor so you can separate the eligible salaries???

By "contractor," are you referring to the leasing company or the taxpayer? Since the taxpayer specifies what the leasing company pays to each employee, there is no problem determining what wages are eligible. Additionally, the leasing company provides detailed wage reports.

[Snaggletooth]

You Knew It Was Coming

Rosie, you knew this question was coming, or you should have.

What about a contractor who has "no" employees and simply gives out
1099s to people who work for them??

Several contractors claim that they only hire "subcontractors" and that all the
people who work for them are subcontractors. Many of these people work
40 hours a week at a fixed rate of pay, but the contractors consider them
"subcontractors" and give them a 1099.

Point is this: how can the IRS allow "leased" employees to a company who
doesn't file a W-3, and have any 50% calculation basis? If they allow a
company "leased" employees then how can they intercept a contractor who
issues 1099s only?

[rosieea]

Snaggle - As I said, I'm getting differing opinions from knowledgeable practitioners. IMHO, the payments to subcontractors are clearly out; there must be W-2 employees. The question is, whose employees are "leased" employees? Court cases indicate that when a leasing company fails to remit payroll taxes, the IRS, under certain conditions, can go after the taxpayer. There is little question that the taxpayer is usually "common law employer," since he directs the hiring & firing, controls the time, place & manner of work, sets the wages, etc. So, it often boils down to whether the leased employee gets paid, whether or not the taxpayer has provided the funds. I'm not necessarily advocating one position or another, but I would invite you to read IRS Notice 2005-14, Sec 3.02, which appears to open the door a bit, as it allows for inclusion of wages paid to employees of the taxpayer (who is defined as the employer under common law rules) by another entity.

I agree that individuals paid as subcontractors creates a problem in this regard. If, using the common law rules, the IRS were to reclassify such workers as employees and require the taxpayer to pay back payroll taxes, I would argue that that would entitle the taxpayer to claim the production deduction, assuming other conditions are met.

[Black Bart]

Cold Comfort

I agree that individuals paid as subcontractors creates a problem in this regard. If, using the common law rules, the IRS were to reclassify such workers as employees and require the taxpayer to pay back payroll taxes, I would argue that that would entitle the taxpayer to claim the production deduction, assuming other conditions are met.

Rose, I'm afraid (chuckle-chuckle) you're offering the boy a flawed gemstone. To put it mildly, the production deduction is going to pale by comparison to employee taxes due if IRS comes along and reclassifies.

Just kidding, Snag. I've got the same problem, all the builders hand out 1099s no matter what, unless it's for one or two "regular" guys that stay with them all year 'round. So it kinda looks like we're outta luck on this one unless we take the "righteous" approach and demand clients reverse common trade practice and issue W-2s for all comers (now there would be a formidable task). Doncha sometimes long for the "old days;" maybe a simpler time in the past when every year without fail did not bring on a fresh onslaught of new legislation, credits, surcharges, this, that, and t'other; etc., etc., etc?

Oh well, what to do but to trudge on? Remember the ending of that old show "The Wild Bunch" in which Ryan & O'Brien share the inside joke--"It ain't like the old days, is it? No, but it'll do!"

[rosieea]

Rose, I'm afraid (chuckle-chuckle) you're offering the boy a flawed gemstone. To put it mildly, the production deduction is going to pale by comparison to employee taxes due if IRS comes along and reclassifies.

No kiddin'. I withdraw the offer

Yeah - I have the same issues with construction folks using nothing but subs. Interestingly, here in Florida, for the construction trades, the only way an independent contractor can exempt himself from workers comp insurance is to be an LLC or incorporate. Now if you go to a worksite and see, say, a dozen guys working, chances are you're looking at 12 LLCs in action.