The IRS recently issued guidelines on a new deduction included in the American Jobs Creation Act of 2004. Construction and renovation contractors are eligible for a 3 percent domestic product deduction for 2005. The deduction increases to 6 percent in 2007, and 9 percent in 2010.

The deduction provides a tax savings on profits on “qualified production activities” such as construction or substantial renovation of real property, including residential and commercial building and infrastructure, that “result in permanent improvements or betterment of property ... and must materially increase the value of the property, substantially prolong the useful life of the property, or adapt the property to a new or different use.” The deduction is limited to 50 percent of reported (W-2) wages paid in that year. Comments on the new regulations are due March 31, 2005.