Made in the USA: The Section 199 Deduction

Made in the USA: The Section 199 DeductionApple pie and baseball are long-standing symbols of our country’s most favorite pastimes. For some businesses, there is a tax deduction that is also strongly associated with America: the domestic production activities deduction (DPAD). This deduction, also known as the Section 199 deduction for its place in the Tax Code, allows U.S. manufacturers and contractors to deduct 9% of their net income from eligible activities.

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The Section 199 deduction is just one of the many tax breaks that are available to contractors and manufacturers.  Learn more about these incentives.

Defining “Domestic Production”

Activities that may qualify for the Section 199 deduction – as long as they are conducted in the United States – include the:

  • manufacturing, production, growth, or extraction of tangible personal property (in whole or in significant part);
  • construction of real property; and the
  • performance of engineering or architectural services in conjunction with real property construction projects.
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The real property may be residential buildings, commercial real estate, or infrastructure.  However, the term “real property” does not include machinery or services relating to delivering and transporting materials.

 

The Tax Code points out that activities typically performed by a general contractor — such as approvals, periodic progress inspections, and required job modifications — also qualify as domestic production.

Calculating DPAD with an Eagle Eye

Correctly computing a company’s DPAD amount typically involves the following steps:

  1. Identify the construction activities that qualify. The majority of work that a contractor does when erecting or substantially renovating real property will most likely qualify, but there are some exceptions. For example, if a contractor sells appliances to a customer as part of a renovation, then the income and expenses related to the transaction would not be included in the calculation.
  2. Calculate gross receipts from the qualifying activity.
  3. Deduct the costs directly related to the qualifying activity.
  4. Allocate applicable indirect costs. The IRS allows for the allocation of certain expenses, such as sales, general costs, and administrative costs.
  5. Calculate the deduction. The 9% deduction is applied to the lesser of the net construction activities income or the taxable income.

CRI Pledges to Help You Take Advantage of the Section 199 Deduction

CRI’s allegiance to our clients means that we strive to help them find as many tax savings opportunities as possible. We are ready to advise you regarding whether your company is eligible for the Section 199 deduction. Please contact us to learn more details.

2018-11-12T15:46:47+00:00December 13th, 2016|CONSTRUCTION, MANUFACTURING & DISTRIBUTION, TAX SPECIALTY SERVICES|