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Domestic Production Activity Deductions (Section 199)

The American Jobs Creation Act of 2004 (“AJCA”) enacted Section 199, which created a tax deduction related to domestic production activities.

The special tax deduction is available only to manufacturing and production activities within the United States and can potentially reduce a company’s effective federal tax rate from 35% to 31.85%. EisnerAmper’s tax group can help your company maximize the Section 199 special deduction.

What types of companies are eligible for the Section 199 deduction?

Manufacturing and production activities pertain to entities operating in various industries and professions including software, construction, engineering, architecture, film production, electric, gas and water as well as certain handlers of agricultural products.

The deduction applies to corporations (C corporations and S corporations), partnerships and limited liability companies.

How do you know if your company is eligible for the Section 199 deduction?

A taxpayer must have domestic production gross receipts (“DPGR”) derived from one or more of three qualifying activities:

  • Any lease, rental, license, sale, exchange or other disposition of tangible personal property that was manufactured, produced, grown or extracted by the taxpayer within the United States, any qualified film produced by the taxpayer in the United States, or electricity, natural gas or potable water produced by the taxpayer in United States.
  • The construction of real property (either residential or commercial) performed in the United States by a taxpayer engaged in the active conduct of a construction trade or business.
  • Engineering or architectural services performed in the United States by a taxpayer engaged in the active conduct of an engineering or architectural services trade or business with respect to construction of real property in the United States.

How is the Section 199 deduction calculated?

The Section 199 deduction is the least of three amounts for 2012 and beyond:

  • 9%  of Qualified Production Activities Income (“QPAI”) for the taxable year,
  • 9% of taxable income for the taxable year, or
  • 50% of the qualifying w-2 wages for the taxable year.

How is the Section 199 deduction treated for pass-through entities?

  • The deduction is applied at the partner/shareholder level.
  • Each owner will take into account his/her distributive or proportional share of items that are allocated to the pass through entity’s qualified production activities in determining the actual deduction allowed.

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