Qualified Production Activities Income - Mechanics

Mechanics

Section 199 allows manufacturers to deduct nine percent of their "qualified production activities income" (QPAI) in 2010 and following years. The deduction is in the process of "phasing-in," with three percent of QPAI allowed as a deduction in 2005 and 2006, and six percent allowed in 2007-2009. The effect of the deduction is to reduce the rate of taxation on QPAI.

QPAI is defined as the portion of taxpayer income which is equal to the excess of the taxpayer's domestic production gross receipts over the sum of the cost of goods that are allocable to such receipts, and other expenses, losses, or deductions which are properly allocable to such receipts.

Domestic production gross receipts is defined in the provision as the gross receipts of the taxpayer derived from any lease, rental, license, sale, exchange, or other disposition of:

1. tangible personal property, computer software, or sound recordings manufactured, produced, grow, or extracted by the taxpayer in whole or significant part within the United States;

2. a qualified film, defined as a non-pornographic film where not less than 50 percent of the total compensation relating to production is compensation for services performed in the United States by actors, production personnel, directors, and producers;

3. electricity, natural gas, or potable water produced by the taxpayer in the United States;

4.construction of real property performed within the United States where the taxpayer is engaged in actively conducting a construction trade or business in the ordinary course of that business; and

5. engineering or architectural services performed within the United States where the taxpayer is engaged in actively conducting an engineering or architectural trade or business and in the ordinary course of that business provides such services with respect to construction of real property with the United States.

However, domestic production gross receipts specifically do not include gross receipts derived from the sale of food or beverages at a retail establishment, from the transmission or distribution of electricity, natural gas, or potable water, or from the lease, rental, sale, exchange, or other disposition of land.