Special to the Times/News

One of the annual mysteries originating in Congress is the concession made in the heat of battle to various groups of taxpayers. Someone proposes a concept, the code writers and computer whiz kids come up with acceptable verbiage and behold, a new law.

United States Code section 199 was added by the American Jobs Creation Act of 2004 [Public Law 108-357]. The purpose of the law was to offset some of the losses American manufacturers sustained through new international agreements.

A whole new concept was created. Below is an example of the possible benefit you may have as a "Domestic Producer."

But first, are you a DOMESTIC PRODUCER? The answer will surprise a lot of readers. A domestic producer may be:

A person involved in construction or substantial renovation of real property in the United States, including residential and commercial buildings and infrastructure such as roads, power lines, water systems and communication facilities.

Or engineering and architectural services performed in the United States and relating to construction of real property.

Or 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;

Or film production [with exclusions provided in the statute], provided that at least 50 percent of the total compensation paid relating to the production of the film is compensation for specified production services performed in the United States.

So, there you have it. Are you a small builder, a developer of residential tracts and homes, an architect designing a historical museum, a farmer, a grape grower? The list may be endless - the code section is broad and inclusive.

You will ask, what does it mean to me in dollars? For the years 2005 and 2006, the deduction is 3 percent of the lesser of taxable Income on your 1040 or the net profit from the activity times 3 percent AND limited by 50 percent of the W-2 wages you paid to employees.

The percentage will phase in: 6 percent in 2007, 2008 and 2009. After 2009, the percentage is 9 percent.

All income is figured at the shareholder level for Partnerships, LLCs and S Corporations - meaning that the taxable income on your form 1040 is the testing amount because income from the partnership, LLC or S Corp. is included in that amount.

Here is an example:

John, a single taxpayer in 2005, earns $40,000 from his regular job.

He had interest income of $1,000.

Gross sales from his business run by a capable manager was $100,000.

Cost of sales was (60,000).

W-2 wages paid to employees was (20,000).

Net profit from this business was $20,000;.

Compute John's taxable income:

Wages - $40,000

Interest - $1,000

Income from Domestic Production above - $20,000

Adjusted Gross Income for 2005 - $61,000

Standard Deduction projected for 2005 - ($5,000)

Exemption projected for 2005 - ($3,200)

TAXABLE INCOME - $51,800

THE TEST [The lesser of A, B or C]:

A. 3 percent of taxable income = $1,554

B. 3 percent of net profit of business = $600

C. Limited by 50 percent of W-2 Wages from Domestic Production = $10,000.

RESULT: A deduction of $600 in 2005. Not much you say? Try your own figures. The benefit could be substantial.

As with any new law there will be interpretations, cautions and perhaps endless litigation when the amounts become significantly larger. But believe me, your tax professionals, EAs, CPAs and some attorneys will become your best friends.

One short story from the early days will illustrate why hastily passed tax legislation sometimes generates unintended consequences.

Years ago, Congress came up with a job- generating law that benefited any firm that increased their employment. It took the form of a cash credit of a percentage of the wages from increased employment over the prior year.

The percentage, as I recall was 25 percent of the increase. Simply put, a gross wage for a restaurant of $100,000 in their first year resulted in a cash credit that would offset income tax of $25,000.

Well, maybe Congress intended that much, but I really think it was overly hasty legislation.

Our firm did the work for perhaps a hundred new businesses that year. So their percentage of increase was 100 percent over zero wages the previous year. Then the credit was 25 percent of that increase.

That was the year that, as tax preparers, we received zucchini, flowers and candy galore from smiling clients who simply could not believe their good fortune when they received huge refunds. And we decided that the tax business was fun again.