Did you know that even if you do not have your own manufacturing facilities, you can still claim the Sec 199 Domestic Production Activities Deduction if you have your products manufactured by a third party on a contract or toll out basis?
The key is to get your contract partner to agree that you have “the benefits and burden of ownership” in the production process. The rules governing the tax treatment of these arrangements under Sec 199 stipulate that only one taxpayer may claim the Sec 199 deduction for a particular activity, hence the importance of getting agreement from your contract manufacturing partner.
Documentation is important in the event the IRS challenges the deduction. Simply put the taxpayer should prepare a written explanation of the basis for the taxpayer’s determination that it had the benefits and burden of ownership during the production process, a certification signed by the taxpayer and another certification signed by the contract partner.
The deduction is 9% of the lesser of qualified production activities income, or taxable income without regard to the deduction.
For further details or explanations, please contact me by email (email@example.com) or telephone (704 491 5201).