The tax break-down section 199, the domestic production activities deduction committee for a responsible federal budget j gastroenterol hepatol


The domestic production activities deduction is the second largest domestic corporate tax break, providing an incentive to domestic manufacturing. A business with “qualified production activities” can take a deduction equal to 9 percent of related income, as per Section 199 of the Internal Revenue Code. Effectively, the deduction gives a 3.15 percent lower rate for qualifying business income (9 percent deduction times 35 percent statutory rate = 3.15 percent).

The eligible activities center around manufacturing, but many other businesses qualify. k gas station In addition to manufacturing, qualified activities include producing electricity and films, selling items manufactured in the United States, engineering, and software development. The deduction is adequately broad that assembling gift baskets, making hamburgers, or roasting coffee qualifies for the deduction. Roughly one-third of corporate activities qualify for the deduction. As former U.S. tax official John Harrington explained, "If you are in the Dow Jones industrial (average), and you are not taking this deduction, there must be something wrong. electricity 2014 It has always applied to a motley crew of activities."

Previously, the tax code allowed for companies to organize foreign subsidiaries, called Foreign Sales Corporations, to exclude income they earned overseas. When the European Union successfully challenged the provision as an export subsidy not allowed under World Trade Organization standards, Congress adopted a new law in 2000 to repeal the Foreign Sales Corporation law and allow companies to exclude income from overseas sales, the “extraterritorial income exclusion” (ETI). The EU challenged this program again as the same subsidy under a different name, and it was again found to contradict the WTO.

In 2004, Congress replaced the ETI with Section 199, giving domestic manufacturers a subsidy without running afoul of the WTO. gas questions Section 199 was designed to phase-in as the ETI phased out: the deduction started in 2005, allowing a business to take a deduction of 3 percent of income. It was increased to 6 percent in 2007, and 9 percent in 2010.

The Section 199 deduction cost $14 billion of foregone revenue in 2013, or nearly $200 billion over the next ten years according to the Joint Committee on Taxation (JCT). Approximately 70 percent of the deduction’s value is used by C-Corporations; the remainder by pass-through companies which are subject to the individual income tax. gas delivery OMB estimates a similar value, $13 billion in 2013.

Although manufacturers benefit the most from the deduction on a nominal basis, the deduction is relatively is more valuable to several other industries. For instance, Section 199 represents 2.9 percent of the tax base for agriculture and hunting, 2.5 percent for construction, and 2.4 percent for information; compared to 2.2 percent for manufacturing. 65 percent of income from information technology and construction firms qualifies for the deduction, compared to about 40 percent for manufacturing.

Opponents of Section 199 state that it is a “ manufacturing tax break gone wild,” arguing that the definitions of qualified activities are so broad that the provision does little to achieve its intended goal and a lot to encourage creative relabeling of existing activities. By favoring some types of domestic production over others, opponents argue, the deduction also distorts domestic investment. electricity physics test And because qualifying activities are defined by a complex set of rules, the deduction increases the difficulty of filing business returns. Finally, opponents point out that achieving broad rate reduction will render the 199 deduction obsolete by effectively providing its intended benefit of lower effective marginal rates to all businesses.

As one of the largest corporate tax breaks, Section 199 has been the target of many tax reform plans which have also lowered the corporate rate. The Fiscal Commission, Domenici-Rivlin, Rep. 4 gases in the atmosphere besides oxygen and nitrogen Charlie Rangel, and Wyden-Gregg tax reform plans, for instance, all got rid of the domestic production activities deduction in favor of a lower corporate rate.

The President’s Framework for Business Tax Reform kept Section 199 and still lowered the overall corporate rate to 28 percent. The proposal expands it to a 10.7 percent deduction, bringing the effective top rate on manufacturing down further to 25 percent. gas and water llc For advanced manufacturing, an 18 percent deduction would bring the effective rate to 23 percent.

A variety of options exist to reform the Section 199 deduction. The policy could be completely repealed, providing $180 billion over ten years or enough revenue to finance a 1.5 percentage point cut in the corporate rate, or repealed only for C-Corps – since pass-through entities would not benefit from a corporate rate reduction. Congress could also reduce the size of the deduction by limiting it to the 2004 level of 3 percent, or the 2007 level of 6 percent.

The deduction could also be restricted by industry, either to hew closer to the deduction’s original purpose of only incentivizing manufacturing, or by prohibiting oil and gas companies from claiming the deduction. gas prices going up in nj As a result of a 2008 law, oil and gas companies are already limited to a 6 percent deduction, and the President’s budget has suggested eliminating it for them. Since the deduction was originally intended to strengthen domestic businesses competing internationally, it could be repealed for businesses that would never be able to move overseas, such as agriculture, utilities, or natural resource extraction.