Tax Deduction For Domestic Production Activities

One of the tax breaks that Congress has enacted to encourage manufacturing and other production in the United States is the deduction for domestic production activities. Under this law a taxpayer can take an extra income tax deduction equal to 9% of its domestic production income.

A taxpayer calculates his domestic production income by taking gross receipts from qualified activities and subtracting costs of goods sold and direct and indirect expenses allocated to the qualified activities. Qualified activities include lease, rental sale or license of property manufactured, produced grown or extracted in the United States. It covers qualified film production and production of electricity natural gas or potable water. It also covers construction of real property or architectural or engineering services connected with the construction of real property. Most service businesses, such as a bankruptcy lawyer, would not be eligible to claim the deduction.

Since part of the purpose of encouraging domestic production is also to encourage domestic employment the deduction for domestic activities production is also limited to 50% of W-2 wages paid by the taxpayer. Thus the deduction is the smaller of 9% of domestic production income or 50% of W-2 wages.