Every business in the manufacturing sector, whether small or large, should consider the manufacturing deduction under IRC § 199. While section 199 comes with a complex set of rules, it nonetheless represents a valuable tax break for businesses that perform domestic manufacturing and certain other production activities. However, businesses should weigh its benefit against the cost of calculating and supporting it. For tax years beginning in 2010 and thereafter, the benefit are fully phased in at 9% of income from qualified production activities, so more businesses may now find the effort worthwhile.

 

This article provides an introduction to the deduction, with an overview of its rationale, background and applicability to a range of domestic production enterprises. It provides some tips and implications for claiming the deduction that might not otherwise be readily apparent to business owners and managers and their CPA advisers, and gives an overview of how the deduction is calculated. For a more detailed treatment of applying and calculating the deduction, see “Sec. 199: Domestic Production Activities Deduction” in The Tax Adviser, May 2010, page 322.

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