Every business in the manufacturing sector should consider the manufacturing deduction under IRC Section 199. While section 199 has a complex set of rules, it represents a valuable tax break for businesses that perform domestic manufacturing activities. The deduction currently equals 9% of income from qualifying activities and is allowed for both regular tax and alternative minimum tax purposes. The deduction is also available to most types of taxpayers, including corporations, flow through entities such as partnerships and S corporations (deduction is allocated to owners), individuals, estates, and trusts.
Section 199 was enacted to encourage domestic production and employment in the United States. There are a number of activities that can qualify. Some of the more common eligible categories of activities are 1) manufacturing, producing, or growing tangible personal property in whole or in significant part within the U.S., 2) construction of real property in the U.S., and 3) performance of engineering or architectural services in connection with U.S real property construction projects. Within each category, a broad range of types of activities are eligible. The tangible property doesn’t always need to be a finished good to be eligible for the deduction, and the taxpayer usually must own the property being produced.
A taxpayer must have positive net income from its qualifying activities (otherwise known as QPAI) in order to take the deduction. A taxpayer’s net income from qualifying activities is determined by taking their qualifying domestic production gross receipts over the sum of the cost of goods that are allocable to such receipts, as well as other expenses, losses or deductions which are properly allocable to such receipts. The lesser of your net income from the qualifying activities or taxable income is then multiplied by 9% to determine the deduction. Thus, a company with a loss for the year cannot claim the deduction. The yearly deduction is also limited to 50% of wages paid to the taxpayer’s employees reported on Form W-2 that are attributable to domestic production.
While the 9% deduction may be somewhat complex to calculate, businesses should weigh its possible tax benefits against the cost of calculating and supporting it. For many businesses, the benefits outweigh the costs involved. For more information contact Joe Wondra at firstname.lastname@example.org or your MarksNelson professional