Is Your Company Leaving Tax Deductions on the Table?

If your company participates in a manufacturing or production process, you might be leaving money in the table

There is a deduction for the sale, lease/rental or license of production activities, officially called the “domestic production activities deduction”.  It is also called the “Section 199” or “DPAD”.  The deduction is the lesser of 9% of net qualified production activities income, 9% of taxable income or 50% of W-2 wages paid by the company to domestic production employees.  The deduction cannot reduce net income below zero, but it can be used against the AMT.  However many states including California, New York and Oregon do not allow the deduction.

The deduction is limited to production activities in the US and is available for the following:

(1)  Oil & gas production

(2)  Agricultural processing (i.e. farmers) including cooperatives

(3)  Manufacturers

(4)  Construction

(5)  Engineering

(6)  Architecture

(7)  Computer software production

(8)  Motion picture production

(9)  Music production

The following example was used in a Congressional hearing defines what is and is not a qualified domestic production activity:  “Suppose you are a baker and in the business of producing donuts. Some of the donuts you sell retail directly to the consumers, and some you sell in bulk to hotels and restaurants. The production costs of the donuts sold at retail do not qualify for the deduction, while the costs associated with the wholesale sales to the hotels and restaurants do”.

The deduction is not limited to just the manufacture or producer, but is also available to companies who outsource the manufacturing or production.  However only one company can take the deduction.  In this case, things can get a bit complicated for the company that takes the deduction and must provide documented proof of the following:

(1)  A statement that explains the basis for the taxpayer's determination that it had the benefits and burdens of ownership in the year or years under examination

(2)  A certification statement, using an IRS form, signed by both companies

If you have already taken this deduction or thinking you should, be warned this is an area the IRS loves to audit.

Please call this office if you wish more information