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Pro tip: Don't miss out on the Section 199 tax deduction

By Sean M. Hugo, CPA

When we reviewed many of our new clients' tax returns we noticed a disturbing trend: they were giving money away! If you are a sole proprietor or a S-Corp, LLC or Partnership, make sure you're not missing out on the section 199 deduction. Here's how. 

Section 199: Gross Domestic Product Activities Deduction

The "gross domestic production activities deduction" (or Section 199, as it is commonly called) has been around since 2004, allowing a deduction of a percentage of qualifying production expenses. It is easy to qualify for, since “production” is defined broadly and it requires only that it take place “in significant part” within the United States. Basically Section 199 is a tax break for businesses to encourage and reward domestic manufacturing. 

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Who is Eligible for a Section 199 Deduction?

The domestic production activities deduction is available to a wide variety of U.S. taxpayers, not just those who export their products. To be eligible for the Sec. 199 deduction, taxpayers must have:

  •  Qualified Production Activities Income (QPAI), which is defined as Domestic Production Gross Receipts (DPGR) for a tax year minus cost of goods sold and other expenses, losses, or
  • deductions allocable or properly attributable to those receipts.

DPGR may also be derived from construction of real property or engineering/architectural services in the ordinary course of business in the United States by taxpayers that actively conduct a trade or business of construction or engineering/architectural services, respectively.

How Much Can You Deduct Under Section 199?

Section 199 deduction is a significant deduction, too: it started out as 3% of the QPAI (Qualified Production Activities Income), was increased to 6% for tax years 2007-2009, and as of 2010 it stands at a healthy 9%. Think of all the money you could be saving!

Limits to Section 199

There is a limit, of course: Section 199 deduction is limited to 50% of the taxpayer’s W-2 wages which can be attributed to domestic production gross receipts.

One last bit of good news? You can file retroactively for the past 3 years!

For more information or to see if you qualify for this deduction please give our office a call.

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