The Section 199 deduction is often overlooked by business owners, perhaps because they’re not sure what it is. You may see it referred to as “the domestic production deduction,” or the “domestic production activities deduction” or “the manufacturers’ deduction.” Here are four more facts about this potentially valuable tax break:
1. It’s a weighty percentage
The deduction is worth as much as 9% of the lesser of qualified production activities income or taxable income. But it’s limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.
2. It’s not only for manufacturers
Despite being sometimes called “the manufacturers’ deduction,” many other types of companies can claim the Sec. 199 deduction. Businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible.
3. It has its limits
The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. It can, however, be used against the alternative minimum tax.
4. It involves math
There’s no denying that calculating the deduction, which involves determining what costs are allocable to domestic production gross receipts, can get complicated. On the bright side, very small businesses can simplify the calculations by using the Small Business Simplified Overall Method. There’s also a Simplified Deduction Method for businesses whose assets are no more than $10 million, or whose average gross receipts don’t exceed $100 million.
No matter what you call it, the Sec. 199 deduction may be a way for your company to get some tax relief. Please contact us for help determining whether your production activities qualify and, if so, how to calculate and claim this tax break on your tax return.