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Guidance on Code Section 199 Deduction Materials


Man in warehouse, orange hardhatThe IRS has released proposed regulations intended to help taxpayers claim the Code Sec. 199 domestic production activities deduction. The IRS provided guidance on materials manufactured, produced, grown, or extracted (MPGE) for purposes of the deduction.


Since creation of the deduction, taxpayers have asked what MPGE activities qualify for the deduction. In the guidance, the IRS explained that MPGE includes manufacturing, producing, growing, extracting, installing, developing, improving, and creating qualified production property (QPP); making QPP out of scrap, salvage, or junk material as well as from new or raw material by processing, manipulating, refining, or changing the form of an article, or by combining or assembling two or more articles; cultivating soil, raising livestock, fishing, and mining minerals.

Specific industries

In 2008, Congress reduced the Code Sec. 199 deduction for taxpayers with oil-related qualified production activities income by three percentage points for tax years beginning after 2009. Under the proposed regulations, oil-related DPGR generally does not include gross receipts derived from the transportation or distribution of oil. The Tax Extenders Act of 2008 expanded the definition of W-2 wages for purposes of the deduction, as applied to a qualified film, to include compensation for services performed in the U.S. by actors, production personnel, directors, and producers. The proposed regulations modify the definition of W-2 wages to reflect the 2008 law. The proposed regulations also revise the definition of qualified film in Reg. §1.199-3(k)(1) to include copyrights, trademarks, or other intangibles with respect to films. Additionally, the proposed regulations describe the application of the film safe harbor to live or delayed television programs.

Other activities

The proposed regulations also address the Code Sec. 199 deduction and Puerto Rico; hedging rules in Reg. §1.199-3(i)(3); application of Code Sec. 199 to agricultural and horticultural cooperatives; and how a taxpayer determines its cost of goods sold to DPGR.

Megan McDonald, CPAIf you have any questions about Code Section 199, contact your tax advisor or Megan McDonald, Manager, Tax Services, at 314.983.1317 or


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