Section 199 – What It Is and How It May Change with Tax Reform
The Domestic Production Activities Deduction (DPAD), was enacted as part of the American Jobs Creation Act of 2004. It is also referred to by its tax code, section 199. DPAD was created to provide tax relief for businesses that produce goods in the United States rather than overseas. This includes individuals, C and S corporations, cooperatives, estates and trusts. Additionally, beneficiaries of an estate or trust and patrons of farming cooperatives can be allocated a share of the DPAD for each entity.
The maximum deduction you can claim under the domestic production activities tax deduction is 9% of the income you earn from the business. Since the intent of the deduction is to increase production and employment in the United States, your business can only qualify if it has employees.
Additionally, the deduction carries two significant limitations: you can only deduct up to half the amount you pay to your workers engaged in domestic production and your deduction cannot exceed your corporation’s taxable income. If you operate a sole proprietorship, S corporation, partnership or LLC, the deduction is limited to your adjusted gross income.
The deduction is calculated based on a taxpayer’s Qualified Production Activities Income (QPAI). QPAI is a calculation of a taxpayer’s total domestic production gross receipts (DPGR) less total allocable expenditures. There are multiple methods that can be used to calculate these deductions and all should be explored each year as what was beneficial one year does not mean it will provide the largest deduction in the next year.
Potential Congressional tax reform set forth in November 2017 calls for an elimination of the Section 199 deduction but the elimination could be offset by proposed reductions in corporate and individual tax rates that are also in the current reform bills.
Cooperatives benefit from the current Section 199 deduction because it applies to proceeds from agricultural products that are manufactured or marketed through cooperatives. Many cooperatives pass the benefit through directly to their farm members so there is concern that a repeal of Section 199 will adversely impact the farming community.
The agribusiness team at BerganKDV is keeping a close eye on the progress of the tax reform bills that are currently on the table and will email updates to clients as they become available. If you aren’t signed up for our e-newsletters, you may do so here.