The Internal Revenue Code Section 199 Domestic Production Activities Deduction (“DPAD”) allows qualified taxpayers to take a deduction related to the performance of domestic manufacturing and production activities. The deduction is equal to nine percent of the lesser of a taxpayer’s qualified production activities income (“QPAI”) or taxable income (limited to 50% of W-2 wages paid by the taxpayer during the year). QPAI is equal to the taxpayer’s domestic production gross receipts (“DPGR”) less cost of goods sold and other allowable expenses, losses or deductions related to the qualified activities (“direct and indirect costs”). In other words, QPAI is equal to the taxpayer’s net income from its domestic manufacturing activities.
Companies with production activities in the U.S. can potentially reduce their effective federal tax rate by up to three percent by claiming the DPAD under Section 199 of the Internal Revenue Code. Though sometimes overlooked due to the complexity of the rules, these tax incentives are not limited to traditional manufacturers and can apply to companies in multiple industries, including:
- Software development, including Software as a Service (SaaS)
- Life Sciences
- Chemicals & Energy
- Food and Beverage
- Film and sound recordings
- Print media
- Engineering and architecture services
- Electricity generation
- Oil and natural gas extraction
Qualified DPAD Activities
Examples of qualified DPAD activities include:
- Lease, rental, license, sale exchange or other disposition of qualifying production property (“QPP”) that was manufactured, produced, grown, or extracted (”MPGE”) by the taxpayer in whole or in significant part within the US;
- Construction of real property in the US;
- Engineering or architectural services performed in the US for construction in the US.
Direct/Indirect costs that can be allocable to DPGR
Examples of direct and indirect costs that can be allocable to DPGR include the following costs:
- Repairs and Maintenance
- Research and development expenses
Anchin has been assisting companies reduce their federal tax liability using Section 199 since it was enacted. We offer a partner-led team, results based approach, and a deep understanding of the opportunity, including the most recent developments.