Question

Renee manufactured and sold a “gadget,” a specialized asset used by auto manufacturers that qualifies for the domestic production activities deduction. Renee incurred $22,800 in direct expenses in the project, which includes $3,000 of wages Renee paid to employees in the manufacturing of the gadget.

What is Renee's domestic production activities deduction for the gadget in each of the following alternative scenarios?

a. Renee sold the gadget for $37,000 and she reported AGI of $84,500 before considering the manufacturing deduction.

                        Domestic production activities deduction is: ___________

b. Renee sold the gadget for $38,200 and she reported AGI of $9,000 before considering the manufacturing deduction.

                         Domestic production activities deduction is: ___________

c. Renee sold the gadget for $41,000 and she reported AGI of $56,000 before considering the manufacturing deduction.

                         Domestic production activities deduction is: ___________

  

Answer 1

(A)

Particular	Amount
Qualified Domestic gross Receipts	$37,000
Allocable costs and expenses	-$22,800
Qualified production activity income	$ 14,200
Statutory Percentage	9%
Domestic production activities deduction is:	$1,278

Renee’s modified AGI of $84,500 exceeds QPAI and the $1,278 deduction is less than 50% of wages paid in the activity (1/2 of $3000=$1500).

(B)

Renee’s modified AGI of $9,000 does not exceed QPAI is limited to modified AGI

Particular	Amount
Qualified Domestic gross Receipts	$38,200
Allocable costs and expenses	-$22,800
Qualified production activity income	$ 15,400
Modified AGI	$9,000
Statutory Percentage	9%
Domestic production activities deduction is:	$810

Renee’s $810 Deduction is less than 50% of wages paid in the activity (1/2 of $3000=$1500).

(C)

Particular	Amount
Qualified Domestic gross Receipts	$41000
Allocable costs and expenses	-$22,800
Qualified production activity income	$ 18,200
Statutory Percentage	9%
Tentative domestic manufacturing deduction :	$1,638
50% of wages limitation DPAD	$1500

Renee’s tentative $1,638 deduction is more than 50% of wages paid in the activity so the DPAD is limited to $ 1500