Manufacturing 199 Deduction

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Top Takeaways

1: The Domestic Manufacturing Deduction Allows a Deduction up to 9% of Net Income

The 9% deduction a company can take equals a percentage of the net income from eligible activities. However, it cannot exceed a business taxpayer’s taxable income or, in the case of an individual, the adjusted gross income.  Also, if the manufacturing activities performed in the U.S. account for 20% of the costs, a company may be eligible for the manufacturing deduction.

2: Manufacturing and Production Activities Eligible under Domestic Manufacturing Deduction

Construction of real property, or engineering and architectural services connected with construction.  The real property may consist of residential or commercial buildings, permanent structures, permanent land improvements, oil and gas wells, and infrastructure.

Also, the Manufacture, production, growth or extraction of tangible personal property.  This encompasses all tangible personal property, computer software and sound recordings. Lastly, the production of electricity, natural gas or water is eligible.

Within the eligible manufacturing production activities stated above, there are various types of “sub-activities” that are eligible for the manufacturing deduction.  Some of the more common are the processing and preparation of food products for wholesale distribution, but not retail; manufacturing or producing components used by another party in later manufacturing or production activities; and finishing items from components manufactured by others.

3: Must Calculate Income From Domestic Activities

To figure the Section 199 deduction, income from qualified production activities should be calculated as domestic production gross receipts, less cost of goods sold and other expenses that are directly allocable to production of the DPGR.  Income and expenses that are not directly related to qualifying activities need to be backed out of the calculation for the qualified production activity income.  After the lesser of the DPGR or taxable income is multiplied by the allowed 9% deduction, the deduction is further limited to 50% of Form W-2 wages allocable to the DPGR.

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