26 U.S.C. § 199 : US Code - Section 199: Income attributable to domestic production activities

Search 26 U.S.C. § 199 : US Code - Section 199: Income attributable to domestic production activities

(a) Allowance of deduction
(1) In general
There shall be allowed as a deduction an amount equal to 9
percent of the lesser of -
(A) the qualified production activities income of the
taxpayer for the taxable year, or
(B) taxable income (determined without regard to this
section) for the taxable year.
(2) Phasein
In the case of any taxable year beginning after 2004 and before
2010, paragraph (1) and subsection (d)(1) shall be applied by
substituting for the percentage contained therein the transition
percentage determined under the following table:
For taxable years The transition
beginning in: percentage is:
2005 or 2006 3
2007, 2008, or 2009 6.
(b) Deduction limited to wages paid
(1) In general
The amount of the deduction allowable under subsection (a) for
any taxable year shall not exceed 50 percent of the W-2 wages of
the taxpayer for the taxable year.
(2) W-2 wages
For purposes of this section, the term "W-2 wages" means, with
respect to any person for any taxable year of such person, the
sum of the amounts described in paragraphs (3) and (8) of section
6051(a) paid by such person with respect to employment of
employees by such person during the calendar year ending during
such taxable year. Such term shall not include any amount which
is not properly included in a return filed with the Social
Security Administration on or before the 60th day after the due
date (including extensions) for such return.
(3) Acquisitions and dispositions
The Secretary shall provide for the application of this
subsection in cases where the taxpayer acquires, or disposes of,
the major portion of a trade or business or the major portion of
a separate unit of a trade or business during the taxable year.
(c) Qualified production activities income
For purposes of this section -
(1) In general
The term "qualified production activities income" for any
taxable year means an amount equal to the excess (if any) of -
(A) the taxpayer's domestic production gross receipts for
such taxable year, over
(B) the sum of -
(i) the cost of goods sold that are allocable to such
receipts, and
(ii) other expenses, losses, or deductions (other than the
deduction allowed under this section), which are properly
allocable to such receipts.
(2) Allocation method
The Secretary shall prescribe rules for the proper allocation
of items described in paragraph (1) for purposes of determining
qualified production activities income. Such rules shall provide
for the proper allocation of items whether or not such items are
directly allocable to domestic production gross receipts.
(3) Special rules for determining costs
(A) In general
For purposes of determining costs under clause (i) of
paragraph (1)(B), any item or service brought into the United
States shall be treated as acquired by purchase, and its cost
shall be treated as not less than its value immediately after
it entered the United States. A similar rule shall apply in
determining the adjusted basis of leased or rented property
where the lease or rental gives rise to domestic production
gross receipts.
(B) Exports for further manufacture
In the case of any property described in subparagraph (A)
that had been exported by the taxpayer for further manufacture,
the increase in cost or adjusted basis under subparagraph (A)
shall not exceed the difference between the value of the
property when exported and the value of the property when
brought back into the United States after the further
manufacture.
(4) Domestic production gross receipts
(A) In general
The term "domestic production gross receipts" means the gross
receipts of the taxpayer which are derived from -
(i) any lease, rental, license, sale, exchange, or other
disposition of -
(I) qualifying production property which was
manufactured, produced, grown, or extracted by the taxpayer
in whole or in significant part within the United States,
(II) any qualified film produced by the taxpayer, or
(III) electricity, natural gas, or potable water produced
by the taxpayer in the United States,
(ii) in the case of a taxpayer engaged in the active
conduct of a construction trade or business, construction of
real property performed in the United States by the taxpayer
in the ordinary course of such trade or business, or
(iii) in the case of a taxpayer engaged in the active
conduct of an engineering or architectural services trade or
business, engineering or architectural services performed in
the United States by the taxpayer in the ordinary course of
such trade or business with respect to the construction of
real property in the United States.
(B) Exceptions
Such term shall not include gross receipts of the taxpayer
which are derived from -
(i) the sale of food and beverages prepared by the taxpayer
at a retail establishment,
(ii) the transmission or distribution of electricity,
natural gas, or potable water, or
(iii) the lease, rental, license, sale, exchange, or other
disposition of land.
(C) Special rule for certain Government contracts
Gross receipts derived from the manufacture or production of
any property described in subparagraph (A)(i)(I) shall be
treated as meeting the requirements of subparagraph (A)(i) if -

(i) such property is manufactured or produced by the
taxpayer pursuant to a contract with the Federal Government,
and
(ii) the Federal Acquisition Regulation requires that title
or risk of loss with respect to such property be transferred
to the Federal Government before the manufacture or
production of such property is complete.
(D) Partnerships owned by expanded affiliated groups
For purposes of this paragraph, if all of the interests in
the capital and profits of a partnership are owned by members
of a single expanded affiliated group at all times during the
taxable year of such partnership, the partnership and all
members of such group shall be treated as a single taxpayer
during such period.
(5) Qualifying production property
The term "qualifying production property" means -
(A) tangible personal property,
(B) any computer software, and
(C) any property described in section 168(f)(4).
(6) Qualified film
The term "qualified film" means any property described in
section 168(f)(3) if not less than 50 percent of the total
compensation relating to the production of such property is
compensation for services performed in the United States by
actors, production personnel, directors, and producers. Such term
does not include property with respect to which records are
required to be maintained under section 2257 of title 18, United
States Code.
(7) Related persons
(A) In general
The term "domestic production gross receipts" shall not
include any gross receipts of the taxpayer derived from
property leased, licensed, or rented by the taxpayer for use by
any related person.
(B) Related person
For purposes of subparagraph (A), a person shall be treated
as related to another person if such persons are treated as a
single employer under subsection (a) or (b) of section 52 or
subsection (m) or (o) of section 414, except that
determinations under subsections (a) and (b) of section 52
shall be made without regard to section 1563(b).
(d) Definitions and special rules
(1) Application of section to pass-thru entities
(A) Partnerships and S corporations
In the case of a partnership or S corporation -
(i) this section shall be applied at the partner or
shareholder level,
(ii) each partner or shareholder shall take into account
such person's allocable share of each item described in
subparagraph (A) or (B) of subsection (c)(1) (determined
without regard to whether the items described in such
subparagraph (A) exceed the items described in such
subparagraph (B)), and
(iii) each partner or shareholder shall be treated for
purposes of subsection (b) as having W-2 wages for the
taxable year in an amount equal to the lesser of -
(I) such person's allocable share of the W-2 wages of the
partnership or S corporation for the taxable year (as
determined under regulations prescribed by the Secretary),
or
(II) 2 times 9 percent of so much of such person's
qualified production activities income as is attributable
to items allocated under clause (ii) for the taxable year.
(B) Trusts and estates
In the case of a trust or estate -
(i) the items referred to in subparagraph (A)(ii) (as
determined therein) and the W-2 wages of the trust or estate
for the taxable year, shall be apportioned between the
beneficiaries and the fiduciary (and among the beneficiaries)
under regulations prescribed by the Secretary, and
(ii) for purposes of paragraph (2), adjusted gross income
of the trust or estate shall be determined as provided in
section 67(e) with the adjustments described in such
paragraph.
(C) Regulations
The Secretary may prescribe rules requiring or restricting
the allocation of items and wages under this paragraph and may
prescribe such reporting requirements as the Secretary
determines appropriate.
(2) Application to individuals
In the case of an individual, subsection (a)(1)(B) shall be
applied by substituting "adjusted gross income" for "taxable
income". For purposes of the preceding sentence, adjusted gross
income shall be determined -
(A) after application of sections 86, 135, 137, 219, 221,
222, and 469, and
(B) without regard to this section.
(3) Agricultural and horticultural cooperatives
(A) Deduction allowed to patrons
Any person who receives a qualified payment from a specified
agricultural or horticultural cooperative shall be allowed for
the taxable year in which such payment is received a deduction
under subsection (a) equal to the portion of the deduction
allowed under subsection (a) to such cooperative which is -
(i) allowed with respect to the portion of the qualified
production activities income to which such payment is
attributable, and
(ii) identified by such cooperative in a written notice
mailed to such person during the payment period described in
section 1382(d).
(B) Cooperative denied deduction for portion of qualified
payments
The taxable income of a specified agricultural or
horticultural cooperative shall not be reduced under section
1382 by reason of that portion of any qualified payment as does
not exceed the deduction allowable under subparagraph (A) with
respect to such payment.
(C) Taxable income of cooperatives determined without regard to
certain deductions
For purposes of this section, the taxable income of a
specified agricultural or horticultural cooperative shall be
computed without regard to any deduction allowable under
subsection (b) or (c) of section 1382 (relating to patronage
dividends, per-unit retain allocations, and nonpatronage
distributions).
(D) Special rule for marketing cooperatives
For purposes of this section, a specified agricultural or
horticultural cooperative described in subparagraph (F)(ii)
shall be treated as having manufactured, produced, grown, or
extracted in whole or significant part any qualifying
production property marketed by the organization which its
patrons have so manufactured, produced, grown, or extracted.
(E) Qualified payment
For purposes of this paragraph, the term "qualified payment"
means, with respect to any person, any amount which -
(i) is described in paragraph (1) or (3) of section
1385(a),
(ii) is received by such person from a specified
agricultural or horticultural cooperative, and
(iii) is attributable to qualified production activities
income with respect to which a deduction is allowed to such
cooperative under subsection (a).
(F) Specified agricultural or horticultural cooperative
For purposes of this paragraph, the term "specified
agricultural or horticultural cooperative" means an
organization to which part I of subchapter T applies which is
engaged -
(i) in the manufacturing, production, growth, or extraction
in whole or significant part of any agricultural or
horticultural product, or
(ii) in the marketing of agricultural or horticultural
products.
(4) Special rule for affiliated groups
(A) In general
All members of an expanded affiliated group shall be treated
as a single corporation for purposes of this section.
(B) Expanded affiliated group
For purposes of this section, the term "expanded affiliated
group" means an affiliated group as defined in section 1504(a),
determined -
(i) by substituting "more than 50 percent" for "at least 80
percent" each place it appears, and
(ii) without regard to paragraphs (2) and (4) of section
1504(b).
(C) Allocation of deduction
Except as provided in regulations, the deduction under
subsection (a) shall be allocated among the members of the
expanded affiliated group in proportion to each member's
respective amount (if any) of qualified production activities
income.
(5) Trade or business requirement
This section shall be applied by only taking into account items
which are attributable to the actual conduct of a trade or
business.
(6) Coordination with minimum tax
For purposes of determining alternative minimum taxable income
under section 55 -
(A) qualified production activities income shall be
determined without regard to any adjustments under sections 56
through 59, and
(B) in the case of a corporation, subsection (a)(1)(B) shall
be applied by substituting "alternative minimum taxable income"
for "taxable income".
(7) Unrelated business taxable income
For purposes of determining the tax imposed by section 511,
subsection (a)(1)(B) shall be applied by substituting "unrelated
business taxable income" for "taxable income".
(8) Regulations
The Secretary shall prescribe such regulations as are necessary
to carry out the purposes of this section, including regulations
which prevent more than 1 taxpayer from being allowed a deduction
under this section with respect to any activity described in
subsection (c)(4)(A)(i).