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"&amp;lt;p&amp;gt;Starting with tax year 2005, certain companies can take a 3% deduction for US-based business activities.&amp;lt;/p&amp;gt;&amp;lt;p&amp;gt;&amp;amp;#34;Every small business is the manufacturing industry should be looking at this as a &amp;lt;a href=&amp;quot;https://www.thebalance.com/small-business-tax-deductions-397640&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;internalLink&amp;quot; data-ordinal=&amp;quot;1&amp;quot;&amp;gt;tax deduction&amp;lt;/a&amp;gt;. While &amp;lt;a href=&amp;quot;https://www.law.cornell.edu/uscode/text/26/199&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;externalLink&amp;quot; data-ordinal=&amp;quot;2&amp;quot;&amp;gt;Section 199&amp;lt;/a&amp;gt; comes with a very complex set of rules, chances are small businesses will qualify for the deduction much easier than the rules depict,&amp;amp;#34; according to Paul Schlather, a senior tax partner with PricewaterhouseCoopers&amp;amp;#39; Private Company Services practice.&amp;lt;/p&amp;gt;&amp;lt;h3&amp;gt;The Basics of the Section 199 Deduction&amp;lt;/h3&amp;gt;&amp;lt;p&amp;gt;Businesses with &amp;amp;#34;qualified production activities&amp;amp;#34; can take a tax deduction of 3% from net income. This is a tax break pure and simple. The more complicated the business, the more complicated the math for calculating the Domestic Production Activities Deduction. In a nutshell, businesses &amp;lt;a href=&amp;quot;https://www.thebalance.com/small-business-guide-to-manufacturing-2221064&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;internalLink&amp;quot; data-ordinal=&amp;quot;3&amp;quot;&amp;gt;engaged in manufacturing&amp;lt;/a&amp;gt; and other qualified production activities will need to implement cost accounting mechanisms to make sure their tax deduction is accurately calculated.&amp;lt;/p&amp;gt;&amp;lt;h3&amp;gt;Qualified Production Activities&amp;lt;/h3&amp;gt;&amp;lt;p&amp;gt;A business engaged in the following lines of business may qualify for the Domestic Production Activities Deduction. These are the &amp;amp;#34;qualified production activities&amp;amp;#34; eligible for claiming the deduction under Internal Revenue Code Section 199:&amp;lt;/p&amp;gt;&amp;lt;ul&amp;gt;&amp;lt;li&amp;gt;Manufacturing based in the United States,&amp;lt;/li&amp;gt;&amp;lt;li&amp;gt;Selling, leasing, or licensing items that have been manufactured in the United States,&amp;lt;/li&amp;gt;&amp;lt;li&amp;gt;Selling, leasing, or licensing motion pictures that have been produced in the United States,&amp;lt;/li&amp;gt;&amp;lt;li&amp;gt;Construction services in the United States, including building and renovation of residential and commercial properties,&amp;lt;/li&amp;gt;&amp;lt;li&amp;gt;Engineering and architectural services relating to a US-based construction project,&amp;lt;/li&amp;gt;&amp;lt;li&amp;gt;Software development in the United States, including the development of video games.&amp;lt;/li&amp;gt;&amp;lt;/ul&amp;gt;&amp;lt;h3&amp;gt;General Rule and Safe Harbor&amp;lt;/h3&amp;gt;&amp;lt;p&amp;gt;The Domestic Production Activities Deduction is limited to income arising from qualified production activities in whole or significant part based in the United States.\u00A0&amp;lt;/p&amp;gt;&amp;lt;p&amp;gt;If any part of manufacturing or production activities is outside the United States, then businesses must use either the safe harbor rule (at least 20% of total costs are from US-based production activities) or allocate costs using the facts and circumstances of their business.&amp;lt;/p&amp;gt;&amp;lt;h3&amp;gt;Not Qualified Production Activities&amp;lt;/h3&amp;gt;&amp;lt;p&amp;gt;The following lines of business are specifically excluded from claiming the Domestic Production Activities Deduction:&amp;lt;/p&amp;gt;&amp;lt;ul&amp;gt;&amp;lt;li&amp;gt;Construction services that are cosmetic in nature, such as painting.&amp;lt;/li&amp;gt;&amp;lt;li&amp;gt;Leasing or licensing items to a related party.&amp;lt;/li&amp;gt;&amp;lt;li&amp;gt;Selling food or beverages prepared at a retail establishment.&amp;lt;/li&amp;gt;&amp;lt;/ul&amp;gt;&amp;lt;h3&amp;gt;Figuring the Tax Deduction&amp;lt;/h3&amp;gt;&amp;lt;p&amp;gt;Calculating the Domestic Production Activities Deduction can be either ridiculously simple or enormously complex, depending on the nature of the business. The key to figuring the Domestic Production Activities Deduction is to examine &amp;amp;#34;qualified production activities income&amp;amp;#34; (QPAI) and the limitations. I&amp;amp;#39;m going to throw out several technical terms, and then explain how to figure the deduction step-by-step.&amp;lt;/p&amp;gt;&amp;lt;h3&amp;gt;Domestic Production Activities Deduction Calculation&amp;lt;/h3&amp;gt;&amp;lt;blockquote&amp;gt;Qualified production activities income (QPAI)&amp;lt;br/&amp;gt;&amp;lt;em&amp;gt;minus&amp;lt;/em&amp;gt; Qualified production activities expenses&amp;lt;br/&amp;gt;&amp;lt;em&amp;gt;equals&amp;lt;/em&amp;gt; Qualified production activities net income&amp;lt;br/&amp;gt;&amp;lt;em&amp;gt;times&amp;lt;/em&amp;gt; The QPA deduction amount of 3%&amp;lt;br/&amp;gt;&amp;lt;em&amp;gt;equals&amp;lt;/em&amp;gt; The Tentative QPA Deduction&amp;lt;/blockquote&amp;gt;&amp;lt;h3&amp;gt;Qualified Production Activity Income (QPAI)&amp;lt;/h3&amp;gt;&amp;lt;p&amp;gt;Qualified production activity income (QPAI) is all income arising from qualified production activities. For a business with only one line of business, this will be the same as gross income. For businesses with multiple lines of business, income will need to be allocated.&amp;lt;/p&amp;gt;&amp;lt;h3&amp;gt;Qualified Production Activity Expenses&amp;lt;/h3&amp;gt;&amp;lt;p&amp;gt;Qualified production activity expenses are all expenses directly related to the qualified production activities. For a business with only one line of business, this will be the same as total expenses. For businesses with multiple lines of business, income will need to be allocated.&amp;lt;/p&amp;gt;&amp;lt;h3&amp;gt;Limitations&amp;lt;/h3&amp;gt;&amp;lt;p&amp;gt;The dollar amount of the Domestic Production Activities Deduction is limited. The deduction cannot exceed &amp;lt;a href=&amp;quot;https://www.thebalance.com/modified-adjusted-gross-income-3193409&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;internalLink&amp;quot; data-ordinal=&amp;quot;4&amp;quot;&amp;gt;adjusted gross income&amp;lt;/a&amp;gt; (for sole proprietors, partnerships, S-corporations, or limited liability corporations) or taxable income (for C-corporations). Also, the deduction cannot exceed 50% of W-2 wages.&amp;lt;/p&amp;gt;&amp;lt;blockquote&amp;gt;Domestic Production Activities Deduction cannot exceed:&amp;lt;br/&amp;gt;Adjusted Gross Income, or&amp;lt;br/&amp;gt;50% of W-2 Wages paid out&amp;lt;/blockquote&amp;gt;&amp;lt;h3&amp;gt;Simplified Method&amp;lt;/h3&amp;gt;&amp;lt;p&amp;gt;&amp;amp;#34;The rules are simplified for a small business in a single line of business,&amp;amp;#34; according to Paul Schlather. Make sure your business qualifies under the qualified production activities\u00A0rules,\u00A0and then take 3% of net income. Compare the 3% figure to adjusted gross income and W-2 wages paid out. A business will not qualify for the Domestic Production Activities Deduction if it has zero net income or zero W-2 wages.&amp;lt;/p&amp;gt;&amp;lt;h3&amp;gt;Where to Claim the Deduction&amp;lt;/h3&amp;gt;&amp;lt;p&amp;gt;Businesses will need to fill out\u00A0&amp;lt;a href=&amp;quot;https://www.irs.gov/pub/irs-pdf/f8903.pdf&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;externalLink&amp;quot; data-ordinal=&amp;quot;5&amp;quot;&amp;gt;IRS Form 8903&amp;lt;/a&amp;gt;\u00A0(PDF). You can also download\u00A0&amp;lt;a href=&amp;quot;https://www.irs.gov/instructions/i8903/index.html&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;externalLink&amp;quot; data-ordinal=&amp;quot;6&amp;quot;&amp;gt;Instructions for Form 8903&amp;lt;/a&amp;gt;.&amp;lt;/p&amp;gt;&amp;lt;h3&amp;gt;Tax Law&amp;lt;/h3&amp;gt;&amp;lt;p&amp;gt;&amp;lt;a href=&amp;quot;https://www.law.cornell.edu/uscode/text/26/199&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;externalLink&amp;quot; data-ordinal=&amp;quot;7&amp;quot;&amp;gt;Internal Revenue Code Section 199&amp;lt;/a&amp;gt;, and IRS Proposed Regulations 1.199. This deduction was part of the\u00A0&amp;lt;a href=&amp;quot;http://thomas.loc.gov/cgi-bin/bdquery/z?d108:h.r.04520:&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;externalLink&amp;quot; data-ordinal=&amp;quot;8&amp;quot;&amp;gt;American Jobs Creation Act of 2004&amp;lt;/a&amp;gt;.&amp;lt;/p&amp;gt;&amp;lt;p&amp;gt;Further reading:&amp;lt;/p&amp;gt;&amp;lt;p&amp;gt;The Domestic Production Activities Deduction is discussed in &amp;lt;a href=&amp;quot;https://www.thebalance.com/books-about-tax-preparation-and-tax-planning-3193400&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;internalLink&amp;quot; data-ordinal=&amp;quot;9&amp;quot;&amp;gt;JK Lasser&amp;amp;#39;s Your Income Tax&amp;lt;/a&amp;gt;, chapter 40.23, and JK Lasser&amp;amp;#39;s Small Business Taxes, chapter 21. The full text of the actual tax law:\u00A0&amp;lt;a href=&amp;quot;https://www.law.cornell.edu/uscode/text/26/199&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;externalLink&amp;quot; data-ordinal=&amp;quot;10&amp;quot;&amp;gt;Internal Revenue Code Section 199&amp;lt;/a&amp;gt;.&amp;lt;/p&amp;gt;&amp;lt;p&amp;gt;Regulations are found in the following nine documents:&amp;lt;/p&amp;gt;&amp;lt;ul&amp;gt;&amp;lt;li&amp;gt;&amp;lt;a href=&amp;quot;https://www.law.cornell.edu/cfr/text/26/1.199-0&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;externalLink&amp;quot; data-ordinal=&amp;quot;11&amp;quot;&amp;gt;Treasury Regulations section 1-199-0 Table of Contents&amp;lt;/a&amp;gt;&amp;lt;/li&amp;gt;&amp;lt;li&amp;gt;&amp;lt;a href=&amp;quot;https://www.law.cornell.edu/cfr/text/26/1.199-1&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;externalLink&amp;quot; data-ordinal=&amp;quot;12&amp;quot;&amp;gt;Treasury Regulations section 1-199-1 Income attributable to domestic production activities&amp;lt;/a&amp;gt;&amp;lt;/li&amp;gt;&amp;lt;li&amp;gt;&amp;lt;a href=&amp;quot;https://www.law.cornell.edu/cfr/text/26/1.199-2&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;externalLink&amp;quot; data-ordinal=&amp;quot;13&amp;quot;&amp;gt;Treasury Regulations section 1-199-2 Wage Limitation&amp;lt;/a&amp;gt;&amp;lt;/li&amp;gt;&amp;lt;li&amp;gt;&amp;lt;a href=&amp;quot;https://www.law.cornell.edu/cfr/text/26/1.199-3&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;externalLink&amp;quot; data-ordinal=&amp;quot;14&amp;quot;&amp;gt;Treasury Regulations section 1-199-3 Domestic production gross receipts&amp;lt;/a&amp;gt;&amp;lt;/li&amp;gt;&amp;lt;li&amp;gt;&amp;lt;a href=&amp;quot;https://www.law.cornell.edu/cfr/text/26/1.199-4&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;externalLink&amp;quot; data-ordinal=&amp;quot;15&amp;quot;&amp;gt;Treasury Regulations section 1-199-4 Costs allocable to domestic production gross receipts&amp;lt;/a&amp;gt;&amp;lt;/li&amp;gt;&amp;lt;li&amp;gt;&amp;lt;a href=&amp;quot;https://www.law.cornell.edu/cfr/text/26/1.199-5&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;externalLink&amp;quot; data-ordinal=&amp;quot;16&amp;quot;&amp;gt;Treasury Regulations section 1-199-5 Application of section 199 to pass-thru entities&amp;lt;/a&amp;gt;\u00A0for taxable years beginning after May 17, 2006.&amp;lt;/li&amp;gt;&amp;lt;li&amp;gt;&amp;lt;a href=&amp;quot;https://www.law.cornell.edu/cfr/text/26/1.199-6&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;externalLink&amp;quot; data-ordinal=&amp;quot;17&amp;quot;&amp;gt;Treasury Regulations section 1-199-6 Agricultural and horticultural cooperatives&amp;lt;/a&amp;gt;&amp;lt;/li&amp;gt;&amp;lt;li&amp;gt;&amp;lt;a href=&amp;quot;https://www.law.cornell.edu/cfr/text/26/1.199-7&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;externalLink&amp;quot; data-ordinal=&amp;quot;18&amp;quot;&amp;gt;Treasury Regulations section 1-199-7 Expanded affiliated groups&amp;lt;/a&amp;gt;&amp;lt;/li&amp;gt;&amp;lt;li&amp;gt;&amp;lt;a href=&amp;quot;https://www.law.cornell.edu/cfr/text/26/1.199-8&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;externalLink&amp;quot; data-ordinal=&amp;quot;19&amp;quot;&amp;gt;Treasury Regulations section 1-199-8 Other rules&amp;lt;/a&amp;gt;&amp;lt;/li&amp;gt;&amp;lt;li&amp;gt; &amp;lt;a href=&amp;quot;https://www.law.cornell.edu/cfr/text/26/1.199-9&amp;quot; data-component=&amp;quot;link&amp;quot; data-source=&amp;quot;inlineLink&amp;quot; data-type=&amp;quot;externalLink&amp;quot; data-ordinal=&amp;quot;20&amp;quot;&amp;gt;Treasury Regulations section 1-199-9 Application of section 199 to pass-thru entities&amp;lt;/a&amp;gt; for taxable years beginning on or before May 17, 2006 &amp;lt;/li&amp;gt;&amp;lt;/ul&amp;gt;"^^<http://www.w3.org/2001/XMLSchema#string>
<https://www.thebalance.com/domestic-production-activities-deduction-3192986>