Every manufacturing business, no matter the size, should consider Internal Revenue Code Section 199, more popularly known as the “domestic production deduction,” as a potential tax break.
Created in 2005 to help offset the repeal of a tax break for U.S. exporters, the domestic production deduction was equal to 3% of the net income from eligible activities. Now (and since 2009) the deduction is 9%.
Don’t Forget the Deduction!
You can imagine how this tax break can add substantial money back to your bottom line, but the domestic production deduction is often not on the radar screen for business owners and financial executives.
Are you taking this deduction on your tax return and if so, are you properly maximizing the deduction amount? With the likelihood of increased tax rates, now is a great time to determine whether you qualify for the Section 199 deduction.
Who Qualifies for the Production Deduction?
The Code Section 199 deduction is allowed for individuals, C corporations, partners and owners of partnerships and S corporations, estates, and trusts.
In 2012, the deduction equals 9% of the net income from eligible activities. The amount of the deduction may not exceed the taxpayer’s taxable income. The deduction also may not exceed 50% of employee W-2 wages related to the domestic production activity.
Eligible Manufacturing and Production Activities
A common misconception about the deduction is that it is only available to manufacturers. Construction contractors, architects and engineers, among others, have claimed the break. The more common eligible activities are:
- Manufacture, production, growth, or extraction in the U.S. of tangible personal property
- Production of electricity, natural gas, or water in the U.S.
- Construction activities in the U.S.
- Engineering and architectural services performed in the U.S.
Calculating the Deduction
Once a taxpayer determines their eligibility, calculating the deduction has its challenges. One must allocate gross receipts between domestic production gross receipts (“DPGR”) and non-domestic production gross receipts. A rule often missed is that if less than 5% of your gross receipts are non-DPGR, then all the gross receipts can be treated as DPGR.
Moving Forward
There are other challenging aspects of calculating the deduction. The Section 199 deduction can be a significant deduction that can help a taxpayer save significant tax dollars if calculated correctly.
If you are unsure whether your business qualifies for the deduction, or if you have questions about how to calculate the deduction, it’s worth seeking guidance from your CPA.
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