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Tax Credit for Domestic Production Activities

What is the Credit: Credit against tax for certain limited qualified production activities performed by the taxpayer in the ordinary course of business that is limited by various factors relating to the income related to these activities

What Activities Qualify:

The tax credit is available for companies that have income from domestic qualified production activities

1. The manufacture, production, growth or extraction in whole or significant part in the US of tangible property, software development, film production, or musical recordings
2. Any lease, rental licensure, sale, exchange or other disposition of qualified production property that is manufactured, produced, grown or extracted by the taxpayer
3. The production of electricity, natural gas, or water in the US
4. Construction or substantial renovation of real property performed in the US in the ordinary course of a trade or business for both residential and commercial application, and their infrastructure such as roads, power lines, water and communication systems
5. Engineering or architectural services relating to the construction of real property in the US

What Activities Are Excluded:

1. Food and beverages prepared at retail establishments, even if some goods are distributed wholesale from that retail establishment, do not qualify as a production activity.
2. Packaging or labeling tangible property produced outside the US does not qualify
3. Design or development activities relating to tangible property produced outside the US does not qualify
4. Contract manufactures that do work for other companies that do not enjoy the benefits and risks of ownership of the tangible personal property do not qualify

How is the Amount Calculated:

The credit amount calculated by utilizing three prescribed methods, which is roughly 6% of the lesser of:

1. Taxable income derived from such qualified production activity, which is the gross receipts from such activity less allocable costs and expenses.
2. Taxable income for the taxable year for the business, limited to 50% of the W-2 wages paid by the taxpayer for the year
3. Partners and shareholders of pass through entities must calculate the credit separately, where each individual is allocated their share of items

Methods Used:

1. Small business method which includes pass through entities with gross receipts of $5,000,000 or less
2. Simplified production method where gross receipts are $100,000,000 or less
3. IRC Sec 861 method where the company is located outside the US, but has a significant part of their activities within the US