Code Sec. 199 – Planning for the Construction Industry

Code Sec. 199 allows taxpayers a deduction based upon gross receipts derived from qualifying production property manufactured in the United States. Construction activities qualify for this deduction.

Based upon a review of your tax return, you may be interested in the highlights of the regulations applicable to the construction industry. For purposes of the domestic production activities deduction, the term “construction” means activities and services relating to the construction or erection of real property in the United States by a taxpayer that, at the time the taxpayer constructs the real property, is engaged in a trade or business that is considered construction for purposes of the North American Industry Classification System (NAICS) on a regular and ongoing basis. A newly formed business is considered to be engaged “on a regular and ongoing basis” in its first year if the taxpayer can reasonably expect that it will engage in the trade or business on a regular and ongoing basis.

Real property is defined as buildings and their structural components such as walls, partitions, doors, wiring, plumbing, central air conditioning and heating systems, pipes and ducts, elevators and escalators, and other similar property. Therefore, domestic production gross receipts derived from the construction of real property includes gross receipts derived from materials and supplies consumed in the construction project or become part of the constructed real property. For instance, an electrical contractor who purchases (not manufactures) wires, conduits, and other electrical materials may derive qualified income from the installation of the materials as well as the materials themselves.

As an administrative convenience, the regulations provide that construction activities include administrative support, and tangential services such as delivering materials to the construction site and removing debris if the taxpayer provides the tangential services in connection with the construction project.

The regulations address many of the concerns and questions regarding the application of Code Sec. 199 to the construction industry, however, the rules are complex and require a review of your particular situation. Please call our office at your earliest convenience so that we may discuss the best way to maximize your deduction.

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