The Underused and Mostly Misunderstood Manufacturing Deduction
Manufacturing has been the back bone of the American economy for decades. Ford Motor, General Motors, and Chrysler are prime examples of manufacturers that built this economy and arguably this nation into the economic powerhouse it is today. Their survival largely depends on the cost of resources and labor, demand, taxes, and many other factors. Cost of resources, labor, demand, and most of the other factors are dictated by the invisible hand of economics and prevailing market conditions. Taxes of course are not; and as such, the federal government has decided to give them a break in light of recent foreign competition, decreased demand, and generally rising costs. Closely held and even family businesses can also benefit from this new tax law.
Manufacturers are now defined broadly. In fact the definition has been interpreted to be so broad; places which brew coffee could possibly be included as a manufacturer for this deduction. The legislative history also says farmers, miners, lumberjacks, and anyone else who grows, manufactures, extracts products in the United States qualifies for the deduction. It is safe to say that if you are producing or assembling anything of value, you may qualify for this deduction. More examples of manufacturers (based off of interpretations from the IRS) includes electricity producers, miners, oil pumps, lumber mills, newspapers; even engineering, construction companies and architectural services and the like are eligible for the deduction.
The deduction is equal to a phased in percentage of the lesser of the following amounts: 1) Taxable Income or 2) Qualified Production Activities Income. Taxable income is self-explanatory, no adjustment must be made. Qualified Production Activities Income (QPAI) has been defined as being a manufacturer’s domestic gross receipts reduced by A) cost of goods sold allocable to QPAI receipts, B) other deductions, and expenses allocable to QPAI receipts, and C) Indirect costs associated with QPAI.
This law provides for uninterrupted, low taxes in future years. If you think you have an operation that may qualify or would like to save on taxes, contact the professionals at The Center for a determination and strategy.