Since its inception in 2004, Section 199 has been a valuable tax break for U.S. manufacturers of tangible goods. However, it does come with a complex set of rules that businesses must understand in order to maximize their tax benefits. This will be especially true if proposed tax reform becomes law. Although typically reserved for U.S. manufacturers of tangible goods, some companies, such as multichannel video-programming distributors (MVPDs) and television broadcasters (those that distribute channels and subscriptions packages) are interpreting the law to their own advantage. They assert that as producers of film, which can be defined as a tangible good, they should be eligible to claim this deduction. As discussed in a previous Bloomberg Tax blog post, to ensure compliance the IRS has developed sweeping changes to their audit approach, creating a specific “campaign” to validate the use of a Section 199 deduction by MVPDs and broadcasters. For this reason it is especially important for companies to ensure they can defend their tax position should an audit arise. Here are some tips for companies looking to maximize the Section 199 deduction:
- Remember that NOL carrybacks can impact Section 199. The amount of the deduction depends on whether it is based on Qualified Production Activities Income (QPAI) or taxable income. Organizations will also need to consider the downstream impacts on state tax.
- Review limitations and accelerate or postpone as needed. For example, if the 50% W-2 wage limitation applies, consider accelerating amounts before year end.
- Understand the revenue impacts of Section 199. This requires that you know the components of Domestic Production Gross Receipts (DPGR) and how it will impact your deduction. To achieve this goal it will be necessary to put processes and systems into place to quickly identify qualified DPGR amounts.
- Match up direct and indirect expenses. Failing to match direct expenses to DPGR could reduce QPAI and thus the deduction. Similarly, failing to match indirect expenses to DPGR could reduce or eliminate the deduction all together.
- Keep in mind that many states have decoupled from Section 199, making it necessary for companies to look at all the states they do business with, and to apply unique state calculations where appropriate.
- Consider using advanced tax planning software now to run various fact-based scenarios in order to maximize your Section 199 deduction, prior to potential tax reform impacts.
Robust multiyear, multi-scenario software (such as Corporate Tax Analyzer™ & State Tax™ Analyzer from Bloomberg Tax) can help you maximize cash tax by managing the federal and state nuances of your Section 199 deduction.