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Domestic Production Activities Deduction

This specialized deduction was created for any companies that Manufacture, Produce, Grow or Extract (MPGE) and should result in 9% of taxable income being taken as a special deduction. Even if an organization currently takes this deduction, it may not be maximizing it, and our specialists can ensure that the company is receiving every dollar that it deserves before the deduction expires. Additionally, we can assist with Foreign Tax Credits and the delicate relationship with this important deduction.

ABGi can successfully maximize the 199 Deduction (DPAD) for companies from the Fortune 5 all the way down to small architectural and engineering firms.

We have numerous examples of Fortune 500 companies that were outsourcing the 199 calculation to a “Big-4” service provider.  In each of the open years, Qualified Production Activities Income (QPAI) was less than the taxable income limitation.  ABGi performed an in-depth analysis and identified multiple solutions that closely reflected the factual situation within the client’s operations.  These solutions included, but were not limited to, a more realistic allocation of indirect costs, and the proper application of the two-step process for allocating and apportioning supportive expenses, and challenging the “silo” mentality so often seen in the work product of other firms.

It is our experience that companies that are not “taxable income limited” have underclaimed the Section 199 tax benefit.  The reasons for this are several, but can be attributed to the following:

  • Over reliance on a process designed to capture most of the benefit with a reasonable expenditure of resources;
  • Over reliance on outsourcing to the staff of a large tax services firm;
  • Over reliance on shortcuts and estimates, such as the use of ratios to allocate cost of goods sold and below-the-line expenses;
  • A shortfall of analysis regarding the unique revenue and expense items that impact each year’s section 199 calculation; and
  • A limited understanding of operational facts and financial accounting decisions across a complex organization.

For example, a Fortune 50 company typically would reach the taxable income limit.  However, in one year the company entered into a transaction that generated a significant gain resulting in a large spread between QPAI and taxable income.  The company had never needed to address this situation in the past, and struggled to determine how to monetize this rather large opportunity.  ABGi identified a multitude of solutions that generated significant tax benefits.  In this situation, our solution captured in excess of $30 million in Cash and $20 million in Earnings Per Share.

With Section 199 repealed for tax years beginning after 2017, it is recommended that corporate taxpayers conduct a final DPAD review for tax years 2014-2017.  Given our focus on Section 199 issues, and the review process, ABGi is positioned to capture all remaining Section 199 tax benefits across all open years.   We offer an efficient, outsourced review of the 2014-2017 DPAD calculation, and provide proven tax solutions that are easily implemented.  Under our standard success-based fee arrangement, fees are due for our services only if clients successfully capture earnings per share and cash tax benefits.

Given that many, perhaps most, companies have underclaimed Section 199 benefits, a strong case has existed since 2005 for improved processes, enhanced expertise, and more rigorous analysis. Enactment of the Tax Cuts and Jobs Act has made the timing even more critical.

Moreover, the scope of the opportunity may have expanded significantly for many taxpayers due to the interplay of the 2017 Repatriation mandated by the Tax Cuts and Jobs Act, and the taxable income limitation in Section 199(a)(1)(B).  Companies that anticipated little or no 2017 taxable income, or a very limited spread between QPAI and 2017 taxable income, may find their Section 199 postures have improved dramatically as the result of repatriated earnings.

Recognizing the current demands imposed by the Tax Cuts and Jobs Act, and the inadvisability of investing time in improved Section 199 processes and expertise, the prudent course is a final review by the foremost experts in the industry.

New Section 199A

  • Benefits Owners of Unincorporated Businesses and S Corporations – The Sec. 199A deduction benefits the owners of “pass-thru entities.”  Pass-thru entities include sole proprietorships, partnerships, Sub S corporations, real estate investors, trusts and estates, and qualified cooperatives.  Limited liability companies treated as sole proprietorships, partnerships and Sub-S corporations qualify, as do real estate investors using a “disregarded” limited liability company to hold their investment.
  • Applies to Ordinary Income – The Sec. 199A deduction is applied to income that would otherwise be taxed as ordinary income at Sec. 1 tax rates. By capturing a 20% deduction, subject to multiple limitations including a taxable income limitation, owners of pass-thru entities can significantly reduce the effective tax rate imposed on this income.
  • The Bigger the Benefit, the More Complex the Rules
  • Although the Sec. 199A deduction may seem fairly simple to calculate, the rules become infinitely more complicated once a taxpayer’s taxable income exceeds certain limits.  For a single individual with taxable income of $157,500 or less, or a married filing jointly individual with taxable income of $315,000 or less, the limitations unrelated to taxable income are not imposed. Unfortunately, once taxable income exceeds these levels all the limitations phase-in which, potentially reduces or eliminates the benefit.

Foreign Derived Intangible Income – New IRC Section 250

  • For the past 50 years the Internal Revenue Code has included various incentives for US companies to export goods (and certain services) that were manufactured within the US.  The Tax Cuts and Jobs Act is no different.
  • Domestic Corporations, specifically C Corps, are allowed a 37.5% deduction based on the eligible income derived from property sold to any person who is not a US person, and which the taxpayer establishes is for foreign use, or for qualified services provided by the taxpayer to any person, or with respect to property, not located within the US.
  • This deduction lowers the effective rate of tax on income generated by qualified sales or services from 21% to 13.125%.  The determination of this potentially significant deduction involves many intricate computations and valuations.
  • The unique expertise ABGI brings to the table is a team of specialists that has been optimizing the long-standing export incentives for nearly three decades who can gather, assess and organize the data necessary to take full advantage of this valuable incentive.

 

 

 

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