As a small business operating in the Sacramento Valley, you’ve probably heard of Section 179 expensing and how it can help your business save money at tax time. You might even have a pretty good understanding of how it works and how you can use it to your advantage on your tax return.
Our Roseville CPAs think that’s a good thing, because one of our goals as one of the Sacramento Valley’s top accountants for wineries, breweries, distilleries, and agricultural businesses is to educate our clients about tax law.
That’s why we’d like to let you in on another little-known tax deduction: Section 199. The Section 199 deduction may not be as well known, but it’s a wonderful deduction for small businesses with manufacturing facilities. While the rules are complicated, the good news is that many small businesses in the winery, agricultural, and manufacturing industries qualify.
What is the Section 199 Deduction?
Did you know that certain business with “domestic production activities” including production of wine, beer, and spirits, can take a tax deduction of nine percent for US based manufacturing activities?
If you own a winery, brewery, or distillery in Roseville, Pacer County, Amador County, or anywhere else in the San Joaquin or Sacramento Valleys and operate a domestic manufacturing facility, you too can take advantage of this tax deduction.
How Does the Deduction Work?
For many small businesses manufacturing a single product line such as wine or spirits, the Section 199 tax deduction is fairly straightforward you simply deduct the nine percent from your net income. If you have several different product lines, then you’ll need to make sure you have a cost accounting method in place to calculate the tax deduction accurately.
If you’re already a client of Cook CPA Group, chances are we’ve probably set up a cost accounting method for your business. If we haven’t, then email call us now at 916-724-1665 and we’ll set one up for this tax year.
Does My Business Qualify?
As long as your business has a US based manufacturing component, it should qualify for the Section 199 Domestic Production Activities tax deduction. Keep in mind, however, that a taxpayer who wants to take advantage of the deduction must have domestic production gross receipts (“DPGR”) derived from a qualifying activity.
What are Qualified Production Activities?
At Cook CPA Group we specialize in tax and accounting services for wineries, breweries, and distilleries, as well as small agribusinesses and farms, so we are happy that our clients can take advantage of the tax deduction for qualified production activities such as:
• Sale of tangible personal property that was manufactured, produced, grown or extracted by the taxpayer in the United States
• Construction, engineering, and architecture for real property
• Electricity Generation
The following activities are specifically excluded from Section 199:
• Construction services such as painting that are cosmetic in nature
• Leasing or licensing items to a related party
• Selling food or beverages prepared at a retail establishment
How is the Section 199 Deduction Calculated?
The Section 199 deduction is complex, but briefly, here are the steps involved in calculating the deduction:
• Identify qualified domestic production activities
• Allocate income from domestic production activities between DPGR (domestic production gross receipts) and non-DPGR
• Calculate expenses by allocating the cost of goods sold and direct and indirect costs to DPGR
• Apportion and allocate below-the-line expenses (e.g. general and administrative costs)
• Calculate QPAI (Qualified Production Activities Income) by subtracting expenses from your DPGR. Generally, your QPAI is net income from qualifying activities. For example, a business such as a winery that only produces wine this amount is the same as your gross income.
In addition, the Section 199 tax deduction can’t exceed 50 percent of your W-2 wages that are allocated to qualifying activities for the taxable year.
A Roseville CPA Can Make Sure You Don’t Miss Important Deductions
To find out how your sole proprietorship or small to medium sized business can realize significant tax savings by taking advantage of the Section 199 tax deduction, call Evelyn Cook, CPA at 916-724-1665.