Utilizing Section 199 Deductions within the Construction Industry


Construction companies can save money by utilizing the domestic manufacturing deduction, also known as the Section 199 Deduction.

As many construction companies face a volatile market and economy, they simultaneously search for avenues by which they can lower costs and save money. Many key players within the industry often resort to reducing benefits, cutting hours and even implementing layoffs, all options which negatively affect a company’s foundation: its employees.

To preserve morale and soften the economic blow, employers should pursue other cost-saving opportunities when possible. One way to save money that very few companies properly and fully utilize is the domestic manufacturing deduction, also known as the Section 199 Deduction.

“Very few companies properly and fully utilize the domestic manufacturing deduction.”

The Section 199 deduction replaced Section 114’s extraterritorial income exclusion for tax years beginning in 2004. This deduction specifically targets domestic manufacturing companies as a way to encourage U.S. production activities. With an initial 3 percent benefit for the year of implementation, the Section 199 deduction has now reached a benefit amount equal to 9 percent of income from qualified activities.

According to the law, domestic production activities encompass the following: mining, oil extraction, farming, construction, architecture, engineering and the production of software, recordings and films. Additionally, there are caveats that allow the deduction to be claimed even if production only partially occurred in the United States.

Although partnerships and S corporations are not allowed to take the deduction, their respective partners and shareholders may still benefit from the calculation. Taxpayers are encouraged to consult with their CPA with regard to the Section 199 deduction due to the complexity surrounding the issue. While the deduction is allowed for both federal regular tax and federal alternative minimum tax, 27 states have decoupled from the federal deduction in some way as of December 31, 2014.

Do your activities qualify?
Eligibility for the Section 199 deduction is available for these activities:

  1. Manufacturing, production, growth and extraction of tangible personal property, in whole or in significant part within the U.S,
  2. Construction of real property within the U.S., and
  3. Performance of engineering or architectural services in the U.S. in connection with real property construction projects

Construction of real property includes residential and commercial buildings, permanent structures and land improvements, oil and gas wells, platforms and pipelines, and infrastructure. Although construction services may encompass substantial renovation, they do not apply to tangential services, regardless of their necessity for the construction process. Tangential services are the likes of trash and debris removal.

Basic steps of the Section 199 deduction calculation
Working with a CPA, construction companies will implement the following steps to claim the Section 199 deduction:

  1. Pinpoint the qualified domestic production activities
  2. Allocate gross receipts to qualified activities at the item level (Domestic production gross receipts)
  3. Allocate cost of goods sold and the line expenses to qualified activities
  4. Calculate the domestic production deduction (9 percent of the lesser of qualified production activities’ income or taxable income)*
    *Limited to 50 percent of wages paid during the calendar year and allocable to DPGR

It is imperative to make sure all applicable expenses are allocated to DPGR in order to get the full benefit of the deduction. Taxpayers wishing to take advantage of the Section 199 deduction should always consult with their tax advisor.

Businesses and individuals with further questions regarding the terms for eligibility may contact Amanda Dillard, LaPorte Senior Manager, at adillard@laporte.com.