Congress implemented the tax deduction as part of the American Jobs Credit Act of 2004, and it is now part of Internal Revenue Code Section 199.
Generally, if your business income qualifies, up to 9 percent of qualified production activities income (QPAI) for the taxable year can be deducted on the tax return. The deduction cannot, however, exceed 50 percent of the W-2 wages paid.
The calculation is made at the entity level. C-corporations can take the deduction from the corporate tax return, while owners of pass-through entities take the deduction on individual returns. Income from a Schedule C or F business might qualify as well as long as there are employee wages.
Domestic production gross receipts are derived from any lease, rental, license, sale, exchange, or other disposition of a qualifying production property (QPP) that is manufactured, produced, grown, or extracted (MPGE) in whole or in significant part within the United States; construction performed in the US; or engineering or architectural services performed in the US for construction projects in the US.
This means that all kinds of businesses outside of the traditional manufacturing industry can qualify for the domestic production deduction, including farming, construction, computer software development and engineering.
As you might guess, determining whether a taxpayer qualifies for the deduction under Section 199 is not simple. Each activity within a business has to be reviewed separately when determining if it qualifies.
If you have never taken this deduction before, you have started a new business, or your current business has had losses in the past but now shows a profit, it might be time to reassess the deduction’s applicability. We have qualified associates who can assist you in making that determination. Recent clarifications to Section 199 mean those who might not have qualified for DPAD previously might now be allowed to take the deduction.
Contact your WK advisor at (573) 442-6171 or (573) 635-6196 to discuss whether this deduction might apply to you.