What is the Domestic Production Activities Deduction

Passed by Congress in 2004, the domestic production activities deduction was intended to offer tax relief for businesses that produce most of their goods or work inside the United States rather than overseas.

BREAKING DOWN Domestic Production Activities Deduction

Also known as the Section 199 deduction, the domestic production activities deduction was in effect from 2005 through 2017 and applied to both small and large businesses that manufactured, grew, extracted, produced, developed or improved goods inside the United States. Using Form 8903, qualifying companies were able to claim the domestic production activities deduction based on a complex formula and set of rules.

Replaced by Qualified Business Income Deduction

With the enactment of legislation known as the Tax Cuts and Jobs Act of 2017 on December 22, 2017, the Section 199 domestic production activities deduction was no longer available after 2017. In its place, Congress created the Section 199A deduction (note the “A”), also known as the qualified business income deduction, which no longer only applies to domestic manufacturing companies. Instead, it permits owners of sole proprietorships, S corporations or partnerships to deduct up to 20% of qualified business income earned in a qualified trade or business, subject to limitations. The motivation of this deduction is to allow these business owners to keep pace with the significant corporate tax cut also provided by the Tax Cuts and Jobs Act of 2017.

While the purpose of the new Section 199A qualified business income deduction is clear, its statutory construction and legislative text is ambiguous. As a result, this deduction has created ample controversy since its enactment. Many tax advisers anticipate that until further guidance is issued, the uncertainty surrounding the provision could lead to countless disputes between taxpayers and the IRS.