In 2004, the American Jobs Creation Act was passed which created a new deduction for manufacturers. This deduction effectively reduces the corporate income tax rate for domestic manufacturing three percentage points from a maximum rate of 35 percent down to 32 percent.
Domestic manufacturers must be explained in more detail because many more manufacturers beside traditional manufacturers qualify for the deduction. These manufacturers include domestic producers in the areas of construction, engineering, energy production, computer software, files and videotape, and processing of agricultural products.
Different Rate for Different Years
For 2012, the manufacturing deduction on qualified production activities is equal to nine percent of the lesser of the qualified production activities income or taxable income for the year.
The deduction started at a transition percentage of three percent for 2005 and 2006 and increased to six percent for 2007 through 2009. For 2010 and later years, the deduction percentage is nine percent.
The deduction is limited to 50 percent of the W-2 wages paid by the taxpayer during the tax year. This can be a problem for some manufacturers that produce a large quantity of product but do not employee very many people. It can also be a problem for companies that employ a large amount of contractors instead of employees. There are no ways around this restriction and therefore, it may be important for a company to plan their employment strategy wisely if they intend to take the domestic manufacturer deduction.
Entities Entitled to the Deduction
Corporations, individuals, S corporations, partnerships, estates, trusts, and cooperatives can take advantage of the domestic manufacturing deduction.