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Two Words Every Manufacturer Should Know: Production Deduction

Posted 4:38 PM by

You have heard the phrase, “What you don’t know can’t hurt you.” Unfortunately, in the tax world, such is not the case. What you don’t know can hurt you and your wallet. As a small business owner in the manufacturing industry if you don’t know the term "production deduction," then it’s time to call your tax advisor or find a new one!

Qualified domestic production deduction refers to section 199 of the Internal Revenue Code and is commonly known as "production deduction." Although there are detailed qualifications and applications of the deduction, most businesses that derive income from producing, manufacturing, growing or extracting a good in the Unites States are eligible for the production deduction. 

The actual amount of the deduction is equal to 9 percent of the lesser of a) income related to qualified production deduction activity, or b) taxable income for that year. The deduction is then limited to 50 percent of the W-2 wages paid by the business in the same year. 

But don’t worry - with all the limits and “lesser of’s” there is still a deduction to be found. For example, let’s say a manufacturing company has net income of $500,000 from producing widgets in the United States. Given that all of the company’s income was derived from producing these widgets, the deduction is 9 percent of $500,000, or $45,000. The deduction is then compared to the company’s W-2 wages paid for the year, which were $250,000. Since 50 percent of the company's W-2 wages ($125,000) is higher than the 9 percent deduction, the $45,000 is not limited.

So, now you know!  Now you know that there is a tax deduction available to businesses that qualify as a U.S. manufacturer or producer. You may not know all of the ins and outs of the deduction, but you know the right questions to ask.

About the Author
Ali Todd is a director in KSM’s Veterinary Services Group. Ali works closely with clients to understand their challenges and provide practical solutions, whether it is tax planning or creating an action plan for enhancing profits.

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