Manufacturers, Others Can Lower Tax Bill With Section 199

With year-end fast approaching, now is a good time for business owners to start thinking about what direction to take in their tax planning. If you’re involved in “qualified production activities” and looking for a smart route to potentially lowering your tax bill, be sure you consider the Section 199 deduction, known as the “manufacturers’ deduction.”

Section 199 Benefits More Than Manufacturers

As you can probably tell by the name, the manufacturers’ deduction was intended to primarily benefit America’s struggling manufacturing industry. But, helpfully, lawmakers made the tax break broad enough to include many other types of businesses — such as companies that work in architecture, film production, software, engineering and construction.

One of the main requirements for the deduction is that your company regularly perform the aforementioned “qualified production activities.” These are generally defined as tasks related to manufacturing, producing, growing or extracting property “in significant part” within the United States.

Getting Started on the Section 199 Deduction

To get rolling on the 199, you’ll need to document your qualified production activities and determine how much income you’ve derived from them. This will require gathering gross receipts from the lease, rental, exchange or other transfer of qualifying production property minus out-of-pocket expenses, such as materials costs.

Having done all of this, you may then be able to claim a deduction equal to 9 percent of the lesser of either your net income derived from your qualified production activities or your entire taxable income for the year. This is up from 6 percent in 2009.

There is, however, an important caveat: The deduction can’t exceed 50 percent of the W-2 wages paid to employees during the calendar year that are allocable to domestic production gross receipts.

The 199 isn’t for everyone, but if you can and you’re able to navigate its administrative twists and turns, you’ll likely be better off when you arrive at your final tax destination. Bear in mind, this discussion has been a greatly simplified explanation. To explore whether your business should consider the Section 199 “manufacturers’ deduction,” contact our tax and manufacturing accounting specialists in Michigan, Houston or Ft. Lauderdale.