US Treasury Releases Guidelines On AJCA Tax Break

by Mike Godfrey, Tax-News.com, Washington

24 October 2005

The United States Treasury Department has released new guidelines clarifying the scope of a tax break on manufacturing income passed as part of the American Jobs Creation Act 2004 (AJCA), although somewhat controversially, software purchased online has been omitted from the regulations.

The provision in question, worth $76.5 billion over the coming decade, created a 9% deduction for qualifying US firms for domestic manufacturing activities, effectively reducing their corporate tax rate to 32% from 35% through 2010. The new rules seek to build and expand upon initial guidance issued by the Treasury Department in January.

The deduction applies to goods manufactured, grown or extracted in the United States and includes architectural services, construction, engineering, film development, and utilities.

The rules also encompass software development, although somewhat controversially, they only apply to software which can be physically purchased by consumers on a medium such as a disc, and do not apply to software downloaded to a personal computer. However, Treasury spokesman Taylor Griffin stated that the department has asked firms for additional comments on the new rules, and is still "open to ideas for better ways to draw the line".

Defense contractors and other businesses engaged in contract work for the government will be allowed to participate in the tax break under the new guidance, as will manufacturers of certain components of a product.

The rules also contain guidance on how home builders should treat the cost of land in determining the value of their tax break from home sales.

The regulations are to be effective for taxable years beginning after December 31, 2004.

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