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Explore overlooked Section 199 deductions

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in Small Business Tax,Small Business Tax Deduction Strategies

In this election year, many small business owners are pleading for tax relief. But the Congressional Joint Committee on Taxation (JCT) is urging more business entities to take advantage of an underutilized tax break that’s already on the books.

Strategy: Investigate the Section 199 write-off for domestic production activities. This tax code provision allows a company to deduct up to 9% of its “qualified production activity income” (QPAI) for the year. If your company is in the top 34% tax bracket, this break may equate to about a 3% tax rate cut.

What’s more, the Section 199 deduction isn’t limited to C corporations. It can be claimed by just about any business entity, including S corporations, partnerships and sole proprietors—even estates and trusts are eligible.

Here’s the whole story: As stated above, the deduction is based on 9% of your company’s QPAI. Generally, QPAI is equal to domestic production gross receipts, reduced by the sum of:

  1. The costs of goods sold that are allocable to the domestic production gross receipts
  2. Other deductions, expenses or losses that are directly allocable to the domestic production gross receipts
  3. A share of other deductions, expenses and losses those are not directly allocable to domestic production gross receipts or another class of income.

Domestic production gross receipts include gross receipts derived from the sale, exchange, lease, rental, licensing or other disposition of qualified production property. The property also must be manufactured, produced, grown or extracted, in whole or in significant part, in the good old USA.

Under the 2004 Jobs Act, the deduction percentage of QPAI was gradually increased from 3% for 2005 and 2006 to 6% for 2007 through 2009 and then 9% for 2010 and thereafter. (However, the Section 199 deduction for oil production activities was reduced by three percentage points for tax years beginning after 2009.) If your company’s overall taxable income before the Section 199 deduction is lower than its QPAI, the deduction is claimed as a percentage of taxable income. Finally, the annual deduction is limited to 50% of the W-2 wages paid out by your company.

Obviously, the deduction is fair game for traditional manufacturers of goods, but it may also be available to farmers, fishermen, miners, construction firms, engineers, architects and a wide variety of other businesses. According to a new JCT report, of the $14.2 billion of deductions claimed annually for domestic production activities, $8.9 billion, or two-thirds, is claimed by taxpayers in the manufacturing sector.   

Tip: Consult with a tax pro to see if your business meets the technical requirements.

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