DOMESTIC PRODUCTION ACTIVITIES DEDUCTION
The Domestic Production Activities Deduction, also referred to as the Section 199 Deduction, provides a deduction of up to 9 percent of taxable income derived from a “qualified production activity.” It is a tax break for businesses that perform production activities and manufacturing within the United States. These production activities include construction, manufacturing, assembly, farming, food processing, software development, audio and video production and even some architectural and engineering services!! The great thing about this deduction is that it is in addition to the deductions your company has already taken. In other words, it operates like a tax credit.
Let’s look at a simplified example of a construction company. During 2010, BuilderCo, a C-Corporation, took in $200,000 in revenues, and had $140,000 of deductible expenses. Therefor the company has $60,000 of taxable income for the year. If the company were not eligible for the Section 199 deduction, it would compute its tax based on the $60,000 of taxable income, and its Federal tax for the year would be $10,000. If, however, BuilderCo was eligible for the Section 199 deduction, it could take an additional $5,400 deduction. That is $5,400 in deductions over and above the deductions BuilderCo already took in computing its taxable income!
Calculating the Domestic Production Activities Deduction appears to be ridiculously simple. In reality the calculation can be quite simple or enormously complex, depending on the nature of the business.
The basic formula looks like this:
Qualified production activities income (QPAI)
- Qualified production activities expenses x
= Qualified production activities net income
Qualified production activities net income
* QPA deduction percentage (9%) x
= Tentative QPA Deduction
The key to figuring the Domestic Production Activities Deduction is to examine "qualified production activities income" (QPAI) and the limitations. While the Section 199 calculation looks simple, underlying this calculation is a very complex set of rules. Fortunately, there are simplified methods available for small businesses, making it much easier to determine your Section 199 deduction. For many small businesses, the thousands of dollars saved in tax each year make it well worth the effort. We can help your company both to compute your current deduction and to help you identify the information needed to make the Section 199 deduction computation easier for future years.
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