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Domestic Production Activities Deduction

How often does Uncle Sam reward taxpayers for simply doing a good job? There is a special deduction designed to encourage domestic production activities. Also referred to as the “manufacturer's deduction,” this write-off effectively slashes the tax rate applied to such activities and does not require any additional cash outlay to qualify.

There have been suggestions to eliminate this deduction entirely, as part of overall tax reform. To date, there have been no formal proposals, but stay alert for possible developments.

Background

In the past, there were 2 special tax regimes designed to assist U.S. companies doing business abroad: the domestic international sales corporation (DISC) and the Extraterritorial Income Exclusion Act. The World Trade Organization viewed these regimes as discriminatory in favor of U.S. companies, and the European Union was authorized to impose sanctions on U.S. goods. In response, these regimes have been replaced by a deduction for domestic production activities. The deduction does not require any foreign distribution of goods or services; it is based on producing things within the United States.

Qualified Producers

Only “qualified producers” can claim the deduction. The term is not limited to traditional manufacturers in the United States. It applies to a ...

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