A special deduction authorized by Section 199 of the tax code is available for domestic production activity expenses. But like many other write-offs, the Section 199 deduction — also called the “domestic production activity deduction” (DPAD) — is being permanently eliminated by the Tax Cuts and Jobs Act (TCJA), beginning in 2018.
However, the Section 199 deduction can still be claimed on 2017 returns being filed this year. In addition to C corporations and pass-through business entities, a self-employed taxpayer can deduct qualified expenses above-the-line on Line 35 of Form 1040.
Be aware that the rules under Section 199 are complex. For starters, the deduction is equal to 9 percent of your “qualified production activities income” (QPAI). QPAI is generally equal to domestic production gross receipts (DPGR), minus the sum of:
- Cost of goods sold that are allocable to DPGR;
- Deductions, expenses or losses that are properly allocable to DPGR; and
- Other expenses, losses or deductions that are not properly allocable to DPGR or another type of income.
For this purpose, domestic production gross receipts include gross receipts derived from the sale, exchange, lease, rental, licensing or other disposition of qualified production property. The property also must be manufactured, produced, grown or extracted, in whole or in significant part, in the U.S. No deduction is allowed for foreign-produced products.
About Ken Berry
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.