Domestic manufacturers can take advantage of the Section 199 deduction. In 2009, qualified businesses may deduct 6% of the lesser of their qualified production activities income (QPAI) or their taxable income. Qualified activities include the production of certain types of film and video, computer software, and energy, as well as certain agricultural processing, construction, engineering, and architectural activities.

Prior to the Tax Increase Prevention and Reconciliation Act of 2006, the Section 199 deduction was limited to a maximum of 50% of the W-2 wages paid by the company during the taxable year. Modifying the wage limitation, the legislation stipulated that taxpayers may allocate only 50% of wages to domestic production gross receipts (DPGRs), which are used to calculate QPAI. Business owners will now have to track the portion of an employee’s time and pay related to qualifying activities.

The allowable deduction jumps to 9% in 2010.