Posts Tagged ‘Section 199’

Revenge of the Tax Policy nerds

Thursday, March 22nd, 2012 by Joe Kristan

The Section 199 deduction — a special 9% freebie deduction off the top of “production” income — is one of the worst ideas enacted in the tax law since the Section 409A rules.  Section 199 taxes income from manufacturing, farming, construction, and related architect and engineer services, at a lower rate than other income.  The arbitrary favoring of one way to make a living over another is economic illiteracy and a tax compliance headache.  It ignores the many supporting services – transportation, human resources, logistics — to say nothing of accounting – that gets stuff from the factory to you.

So tax nerds with long memories can smile a bit at defeat in a primary this week of Congressman Donald Manzullo.  The Illinois Republican lost after being redistricted to the same district as another congresscritter.  Mr. Manzullo “led the charge” to get Section 199 enacted in 2004. 


He lost after House Majority Leader Eric Cantor endorsed his Tea Party-linked opponent (via Instapundit).  So maybe the Section 199 deduction might go away?  Maybe Congress will swear off micromanaging the economy through the tax law? Don’t get your hopes up.




I manufactured cheeseburgers on the grill yesterday

Monday, March 12th, 2012 by Joe Kristan

20120312-1.jpgDarned if David Cay Johnston doesn’t have this right:

But his plan to treat


Section 199: What about Co-ops?

Monday, February 16th, 2009 by Joe Kristan

Roger McEowen of the Iowa State University Center for Agricultural Law and Taxation has a great piece up for anybody wrestling with the “Domestic Production Activities Deduction” as it affects cooperatives: Domestic Production Activity Deduction for Members of Cooperatives.


The bailout: more on the tax provisions

Thursday, October 2nd, 2008 by Joe Kristan

While most of the tax provisions attached to the bailout bill that passed the Senate yesterday were extensions of the “expiring” tax breaks that never actually seem to expire, there are a few new ones. The three original tax provisions of the failed House bill are in there, but there are also a few odd new provisions.
For example, the bill makes all machinery and equipment placed in service in a farming business in 2009 5-year property. Considering that farmers already qualify for the $125,000 Sec. 179 deduction for such property, this is a nice little spiff for an industry enjoying some of its most profitable times ever.
The bill also extends the Section 199 domestic production boondoggle to our strategic film and television production industry; this will enable the economy to pull itself up by its sitcoms.
Oddly, the bill caps the Section 199 deduction for domestic oil production at 3%, vs. the usual 6%, so as not to encourage too much of that; heaven knows we don’t need any more domestically-produced oil.
ISO-AMT victims will get to claim as cash refunds up to 50% of their unused long-term AMT credits, starting in 2008. The bill also abates all interest and penalties attributable to unpaid taxes on ISOs, with a credit for those who have already paid such interest and penalties.
The bill imposes information reporting on brokers, requiring them to report on 1099s the basis and gain on securities trades, starting in 2011.
And perhaps most importantly, the bill exempts children’s wooden practice arrows from the 39-cent-per-shaft excise tax otherwise imposed on arrows. And why shouldn’t Congress shaft us a bit more?
A roundup of the provisions is below the fold. You can check with the TaxProf and the TaxGrrl for additional coverage.
Text of Senate Bill
Related: Saving the economy, one tax preparer at a time




Tuesday, June 3rd, 2008 by Joe Kristan

The riduculous but useful Section 199 tax break – a 6% deduction for “production” income that is intended to aid manufacturers – prompts an interesting reader question (modified for my convenience).

I found & read your good stuff on Section 199. If a dentist has a machine that manufacturers crowns (which the dentist then inserts) does this qualify (by the dentist manufacturing the crown, they are not outsourcing the function to a dental laboratory).
Lets say the dentist has taxable income of $600,000 & $100,000 comes from manufacturing the crowns. How would his lower tax rate work?

First, it would appear that making the crowns qualifes as manufacturing. Lets start with a quick review of the weird alphabet soup of Section 199:
MGPE = Manufactured, Grown, Produced or Extracted
QPP = Qualified Production Property
DPGR = Domestic Production Gross Recipts
The deduction is 6% of taxable income from “qualified production property,” which includes items “mantufactured, grown, produced or extracted” by a taxpayer.
So, to the regulation (Reg. 1.199-3(e); emphasis mine):

(e) Definition of manufactured, produced, grown, or extracted–(1) In general. Except as provided in paragraphs (e)(2) and (3) of this section, the term MPGE includes manufacturing, producing, growing, extracting, installing, developing, improving, and creating QPP; making QPP out of scrap, salvage, or junk material as well as from new or raw material by processing, manipulating, refining, or changing the form of an article, or by combining or assembling two or more articles; cultivating soil, raising livestock, fishing, and mining minerals. The term MPGE also includes storage, handling, or other processing activities (other than transportation activities) within the United States related to the sale, exchange, or other disposition of agricultural products, provided the products are consumed in connection with or incorporated into the MPGE of QPP, whether or not by the
taxpayer. Pursuant to paragraph (f)(1) of this section, the taxpayer must have the benefits and burdens of ownership of the QPP under Federal income tax principles during the period the MPGE activity occurs in order for gross receipts derived from the MPGE of QPP to qualify as

So if a dentist makes and “installs” his own crowns, it would appear that the income from both the manufacture and the “installation” should qualify. This example from the regs seems on point:

…Y manufactures the replacement parts it uses for the reconstruction and refurbishment of customers’ tangible personal property. Y has the benefits and burdens of ownership under Federal income tax principles of the replacement parts during the reconstruction and refurbishment activity and while installing the parts. Y’s gross receipts derived from the MPGE of the replacement parts and Y’s gross receipts derived from the installation of the replacement parts, which is an MPGE activity pursuant to paragraph (e)(3) of this section, are DPGR (assuming all the other requirements of this section are met).

So what does this mean in example? In the simplified example, $100,000 of taxable income is from “manufacturing” the crowns, so the taxapyer would get a $6,000 Section 199 deduction (100,000 x 6%). But it gets much more complicated. A few of the factors that apply in real life:
– What is the “taxable income” from the manufacture and installation of the crowns? You have to allocate overhead costs between other dental income and services.
– Unless the dentist is practicing as a schedule C sole proprieter, you have to determine who the “taxpayer” is that gets to take the Section 199 deduction. If he is a C corporation, he may have to withdraw all of the income from his professional corporation as salary or pay a 35% tax starting with the first dollar of income. Since the Section 199 deduction would be based on taxable income at the P.C. level, the deduction would be zero because there would be no corporate taxable income after salary.
– If the dentist practices in an S corporation, he has to deal with the usual juggling of salary that S corporation professionals must deal with. If he pays himself too little salary, he can look forward to a battle with the IRS.
– Would the IRS accept “installing” crowns as a manufacturing process, rather than a service?
In an ideal world, there would be no Section 199 deduction; it makes no sense in a modern economy to try to draw neat borders between “manufacturing” and “services.” Even if you could, why is it somehow morally better to make money running a foundry rather than, say, saving lives by doing surgery?
But we go to war with the tax code we have, and I get to charge for applying it, so think about it – you may be a “manufacturer” without realizing it. If so, you’d be foolish to pass up the deduction.
Flickr image courtesy Mr.Thomas



Thursday, December 6th, 2007 by Joe Kristan

Congressional Democrats issued their new Energy Bill yesterday. This shows how a change of parties in Congress can really accomplish something. Where the last energy bill from a Republican Congress was a hodgepodge of tax credits directed to politically-powerful constituencies, the Democrats have instead proposed a hodgepodge of tax credits directed to politically-powerful constituencies.
The bill proposes to pay for the giveaways by punishing the oil industry, repealing the Sec. 199 deduction for oil companies. I’m all in favor of repealing the moronic Sec. 199 deduction, but not just for a few, and not just to replace it with equally foolish targeted tax breaks.
The Tax Prof has the link-rich roundup.