The Section 199 deduction is intended to encourage domestic manufacturing. In fact, it’s often referred to as the manufacturers’ deduction. But this potentially valuable tax break can be used by many other types of businesses besides manufacturing companies.

Sec. 199 deduction 101

The Sec. 199 deduction, also called the “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.

Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production, and agricultural processing also may be eligible.

The deduction is not allowed in determining net self-employment earnings and generally cannot reduce net income below zero. But it can be used against the alternative minimum tax.

How income is calculated

To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of domestic production gross receipts (DPGR) exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t—unless less than 5% of receipts are not attributable to DPGR.


  • Computer software, and
  • Master copies of sound recordings.


Contact us to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2016 return.