Benefits and Burdens Would No Longer Determine Sec. 199 Deduction

By Sally P. Schreiber, J.D.

The IRS has proposed removing the benefits-and-burdens-of-ownership rule for determining which party to a contract manufacturing agreement should get the Sec. 199 domestic production activities deduction related to those activities. In its place, the proposed rules would provide that, if a qualifying activity is performed under a contract, then the party that performs the activity is the taxpayer for Sec. 199(c)(4)(A)(i) purposes.

Generally, only one taxpayer may claim the Sec. 199 deduction for any qualifying activity performed in connection with qualifying property. When taxpayers enter into a contract manufacturing agreement with an unrelated party to perform qualifying activities in connection with qualifying property, current Regs. Sec. 1.199-3(f)(1) provides that only the taxpayer that has the benefits and burdens of the property during the period the qualifying activity occurs is treated as engaging in a qualifying activity.

Citing the complexity of applying a multifactor benefits-and-burdens test to each contract manufacturing activity and the possibility that more than one taxpayer will take the deduction for the same manufacturing activity, the IRS said its proposed new rule is “consistent with the statute’s goal of incentivizing domestic manufacturers and producers,” and would make it easier to prevent more than one taxpayer from being allowed a Sec. 199 deduction for any qualifying activity (preamble to the proposed regulations).

Comments on the proposed rules should be sent to the IRS by Nov. 25. A public hearing is scheduled for Dec. 16.

Sally P. Schreiber ( is a Tax Adviser senior editor.

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