The domestic production deduction introduced in 2005 is increased to 6 percent of qualifying taxable income in 2007. Taxpayers are allowed a deduction of 6 percent of income from domestic production gross receipts (9 percent after 2009). Domestic production gross receipts are from items manufactured, produced, grown or extracted within the United States.

Most construction contracts will qualify for this deduction. The sale of land does not qualify for the deduction, but the regulations provide a safe harbor for allocating the sale proceeds between land and actual construction. Consequently, even the sale of residential lots can qualify as there is a component of the raw land which does not qualify and the development or construction which does qualify. The deduction is limited to 50 percent of wages paid in the activity.

Does your spouse or child perform services for your business? If they do or could, there’s an opportunity to take advantage of additional tax deductions. Employing a spouse can make him or her eligible for health benefits on a tax-deductible basis, and retirement benefits on a tax-deferred basis. For example, your spouse could defer up to $15,500 into a company 401(k) plan or $10,500 into a SIMPLE plan. These limits are increased to $20,500 and $13,500 if your spouse is age 50 or older. They would also be eligible for the applicable company contributions to the retirement plan. Children also could take advantage of these benefits, or they could earn up to $9,300 and pay no income tax by contributing $4,000 to an IRA.
Residential contractors are eligible for a $2,000 tax credit for energy-efficient homes sold in 2006, 2007 and 2008.

Qualifying homes must be certified to provide a reduced level of heating and cooling energy consumption compared to a comparable structure as defined in the International Energy Conservation Code. Due to strict building codes in some states, many homes currently being constructed will qualify for this credit or could qualify with slight modification in design or materials. The credit falls under the general business credit. As such, it cannot be used to reduce the alternative minimum tax.