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Manufacturers’ Deduction

August 4, 2015

The manufacturers’ deduction, also called the “Section 199” or “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.

The deduction is available to traditional manufacturers and to businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing. It isn’t allowed in determining net earnings from self-employment and generally can’t reduce net income below zero to create a net operating loss (NOL); however, it can be used against the AMT.

A NOL occurs when operating expenses and other deductions for the year exceed revenues. Generally, an NOL may be carried back two years to generate a refund. Any loss not absorbed is carried forward up to 20 years.

Carrying back an NOL may provide a needed influx of cash. However, you can elect to forgo the carryback if carrying the entire loss forward may be more beneficial, such as if you expect your income to increase substantially or tax rates to go up.

If you have any questions or would like discuss potential deductions for your business, please contact LGT at askus@lgt-cpa.com.

The services of a legal or tax advisor should be sought before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt, PLLC, call 214.871.7500 or email at askus@lgt-cpa.com.

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