Domestic Production Activities Deduction

(Manufacturers' Tax Deduction)

What is it?

In 2004, Congress created the American Jobs Creation Act.  Section 199 of this Act, better known as the “manufactures’ tax deduction” was created to benefit a broader range of businesses within the United States and provide incentives to companies that manufacture in the U.S.

Congress enacted the manufactures tax deduction as a response to the World Trade Organization’s disagreement with the extraterritorial income exclusion (ETI).  ETI tax benefits were under scrutiny by foreign countries involved in the WTO because they felt that the U.S. businesses conducting sales in foreign countries were being subsidized by the U.S. government under the structure of the ETI deduction.  The ETI tax benefits were available to any U.S. taxpayer that exported property that was manufactured or produced in the United States.

The manufacturer’s tax deduction circumvents the WTO’s no export subsidy rule because the deduction applies to all manufacturing companies, not just those companies that export their goods around the world.

How is the deduction calculated?  

The deduction applies only to companies that pay W-2 wages and only for production inside the United States. The company calculates its qualified production activities income.  This total is multiplied by 3% (scheduled to increase, see below) to determine the qualified deduction.

How does the deduction affect FRC members?

The manufactures tax deduction has special provisions allowing cooperatives to calculate the deduction on their tax returns and pass through the deduction to their members. 

This deduction is scheduled to increase over the next few years.  The increase schedule is:

Example:  Member has 50,000 cwt in 2006 crop.  50,000 x $.395 = $19,750 tax deduction.

FRC recommends you consult with your tax advisor about utilizing this deduction.

For further information, please contact your FRC Field Representative or click the “Contact Us” link.