The IRS issued new eligibility guidelines last year that attempt
to clarify which companies are eligible for the manufacturers'
deduction under Section 199 of the tax code when multiple parties
manufacture a product. Contractual manufacturing arrangements have
historically been the source of much confusion when it comes to
this deduction. This article explains the deduction and how the new
guidelines are intended to make it easier for manufacturers to
comply with its requirements.
How the Deduction Works
The manufacturers' deduction — also known as the Sec.
199 or domestic production activities deduction — allows a
federal income tax deduction when manufacturers derive income from
selling, leasing or renting items made in the United States, as
well as from unrelated energy and motion picture production. This
deduction equals 9% of the lesser of a business's qualified
production activities income (QPAI) or its taxable income (or
adjusted gross income for
