The Section 199 deduction is often called the “domestic production deduction.” Although production is typically synonymous with manufacturing, tax law applies the term more broadly: Contractors, architects, engineers, and even design firms may qualify, too! Here’s what you should know about this potentially advantageous—and often misunderstood—deduction:
What is the Section 199 deduction?
The Section 199 deduction has been around since 2005, so it’s not necessarily a new thing. Generally speaking, it gives businesses a way to deduct a percentage of U.S. qualified income. It hasn’t changed much over time besides the rate of deduction, which increased from 3 to 9 percent from 2005 to 2010 and hasn’t changed since.
How do I qualify for it?
The rules and requirements associated with the deduction are fairly complex, but the good news is you don’t have to go out of your way or incur expenses to qualify for it—it’s simply a byproduct of what you do in your business. More good news: it can be fairly substantial. In 2017, the 199 deduction could deliver a tax break of more than 3 percent of profits for a business in the 35 percent tax bracket. Keep in mind, however, that it applies only to profitable businesses.
The deduction is not limited to typical manufacturing. The tax code defines “domestic production activity” as any item that is manufactured, produced, grown or extracted. This definition covers the production of tangible personal property, including often overlooked categories such as crops, electricity, natural gas, water, films, videos, software, engineering or architectural services, and construction of real property.
Don’t miss an opportunity for tax-savings
Even if you think the 199 deduction won’t apply to your business, have your accountant look into it. The IRS recently released a memorandum approving the deduction for renovation construction companies, and it’s possible the list of qualifying businesses will continue to grow. With tax rates as high as they are, it’s worth taking advantage of every deduction you can get.