Section 199 Deduction and the Construction Industry
The holiday season is upon us: Thanksgiving, Christmas, New Year’s Day and Tax Return Preparation! All over the land, Certified Public Accountants (CPAs) are busy updating their software, familiarizing themselves with the new laws and restocking their liquor cabinets.
The recent tax reform proposals add special excitement, bringing new provisions and removing some old ones. One current provision, slated to be repealed, should be of special interest to construction firms and building product manufacturers, as it offers a deduction of up to 9% of gross revenues derived from manufacturing and construction activities: the Domestic Production Activities Deduction (DPAD), Internal Revenue Code (IRC) Section 199.
The DPAD was designed to provide tax relief to manufacturers producing goods in the U.S. and to discourage outsourcing overseas. This includes all you manufacturers of building materials and structural components of buildings produced in the U.S. Wood, chemical and textile products all qualify, as does cement.
Not only that, but the construction and or substantial renovation of real property performed in the U.S. also qualifies. Each and every contractor involved in a construction project, from the cement pourer to the plumber and painter, can benefit from the deduction.
But wait, there’s more! Engineering and architectural services performed in the U.S. for domestic construction projects also qualify for the DPAD deduction.
There are a whole slew of acronyms used to describe the mechanics of the DPAD: QPP, QPAI, DPGR, and you can leave them to your CPA to expertly navigate. Here’s the skinny:
The deduction equals the smallest of
1. 9% of taxable income from qualified production activities, so you need taxable income from either manufacturing or the various construction/engineering/architectural services. (Generally we’re talking about gross revenues, minus cost of goods sold, minus admin.) OR
2. 9% of all taxable income. OR
3. 50% of all wages paid in relation to the manufacturing/construction process, so you need to have paid W2 wages.
In short, if you’ve got $200,000 of income, after Cost of Goods Sold (CoGS) and admin from construction or the production of building materials, you could be looking at a deduction of up to $18,000. Put that in your 1040 and smoke it!
The DPAD, sometimes referred to as the manufacturer’s deduction or simply Section 199, was a provision enacted in the American Jobs Creation Act of 2004. Both the House and the Senate currently have a version of their Tax Cuts and Jobs Act making its way through Congress that would eliminate this deduction.
In both versions of the bill, the DPAD would be repealed in the near future. The House proposal has the DPAD repeal becoming effective for tax years starting after December 31, 2017. The Senate’s version delays the repeal to tax years starting after December 31, 2018.
For sure there are details and calculations but they are not too complicated and the requirements are basic (income from domestic construction and or manufacturing activities, and W2 wages paid). The main thing you need to know is that there are potential tax savings out there for one more year, or two, assuming the bill becomes law in its current iteration.
So, pry that CPA of yours away from the liquor cabinet and tell them that you want to know more about Section 199, the Domestic Production Activities Deduction.
Here’s wishing all of you a wonderful holiday season…and many happy returns!
Bill Amster has served as the controller at BidClerk for the past 10 years. Prior to that he worked in the public accounting field. Bill lives in Chicago with his wife and children.