Most commonly taken advantage of by traditional manufacturers for tax savings is the Domestic Production Activities Deduction (or “Section 199”). If you’re like most businesses, you may not know that the “manufacturers’ deduction” isn’t limited to traditional manufacturers. Businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible for a deduction up to 9 percent of net income from qualified production activities. Doeren Mayhew’s manufacturing accounting professionals explain below.

What Qualifies for the Domestic Production Activities Deduction?

You are most likely eligible for the deduction if your business is involved in any type of domestic manufacturing or production activities. Outside of traditional manufacturing, this could include:

  • Construction firms building/renovating residential or commercial property
  • Engineering and architectural firms working on U.S.-based construction projects
  • Film and video producers selling, leasing or licensing motion pictures produced in the United States
  • Computer software companies developing software domestically
  • Electricity and natural gas producers
  • Food and beverage producers selling to wholesalers

However, there are some limitations that are specifically excluded:

  • Construction services that are cosmetic in nature, such as painting
  • Leasing or licensing items to a related party
  • Selling food or beverages prepared at a retail establishment

How is the Deduction Calculated?

While calculating the actual deduction can be complex, you can estimate your potential deduction by:

  1. Determining your company’s Domestic Production Gross Receipts (DPGR)
  2. Deducting any expenses, losses and other deductions that can be allocated to DPGR, which will produce your qualified production activities income (QPAI)
  3. Multiplying the lower of your QPAI or taxable income by 9 percent

To start taking advantage of manufacturing accounting strategies such as the domestic production activities production, contact a manufacturing CPA in our Michigan, Houston or Ft. Lauderdale office.