WorldWide Drilling Resource

57 WorldWide Drilling Resource ® FEBRUARY 2015 Drilling Into Money Not Boring by Mark E. Battersby Reaping Tax Savings with Section 199 Overlooked, misunderstood, confus- ing, or just too complex and not worth the trouble, many in the drilling industry are overlooking a unique 9% deduction on their federal tax returns. The so-called “Section 199” tax deduction (also referred to as the domestic manufacturing deduc- tion, U.S. production activities deduction, and domestic production deduction) is a tax break for every business that performs what our lawmakers call “domestic man- ufacturing” or other production activities. While Section 199 comes with a very complex set of rules, chances are many drilling businesses, even those not thought of as “manufacturers” can qualify for the 9% deduction. In fact, many businesses other than traditional manufacturers fall under this broad definition. In general, Section 199 of the tax law allows a deduction equal to 9% of the lesser of (A) the “qualified produc- tion activities income” (QPAI) of the taxpayer, or (B) the operation’s taxable income for the year. Any businesses with QPAI can take a deduction of 9% of their net income. On the downside, since the domes- tic production activities deduction was also intended to encourage businesses to hire more employees in the United States, only businesses with employees qualify for the deduction. Otherwise, any corporation, partnership, individual, or other business entity may claim this de- duction for its qualified production activities. Although Section 199 does not apply to sole proprietors, the tax benefit can be passed through to individuals by Subchapter S Corporations, partnerships, and limited liability companies not taxed as corporations. For pass-through enti- ties, the deduction applies at the part- ner or shareholder level. Qualified production activities in- clude manufacturing, producing, growing, and extracting tangible personal prop- erty. Also computer software; sound recordings; and the construction and substantial renovation of real property, including infrastructure. The production of certain films is also a qualifying activity, as are certain engineering or architec- tural services. Within those categories, a broad range of types of activities are eligible. Raw materials and finished products may be either new or made from scrap, salvage, or junk material. Section 199 Domestic Production Activities Deduction can provide signif- icant bottom-line benefits to any drilling- related business which could conceivably be considered to be engaged in “man- ufacturing,” whether small or large. Ad- mittedly, the complicated nature of the Section 199 deduction presents numer- ous pitfalls for every drilling company. Obviously, professional assistance will be necessary to determine eligibility, as well as for computing the allowable deduction. Mark Mark E. Battersby may be contacted via e-mail at michele@ worldwidedrillingresource.com +3$ (1 -.2 )312 /0("$ !32 2'$ .4$0 ++ 1$04("$ -# $6/$0($-"$ .%%$0$# !7 '0../ ."* (2 .,/ -7 - $&(12$0$# 0& -(8 2(.- .6 9 .-* 5 6 , (+ 1 +$1 2'0../0."*!(2 "., 555 2'0../0."*!(2 ".,