Section 199 Rules Would Give Contractors Benefits, Burdens

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Aug. 26 — Contract manufacturers hired to perform qualifying activities to produce a good can take a domestic production deduction, the IRS said in proposed rules.

The regulations (REG-136459-09, RIN 1545-BI90), proposed Aug. 26, address a long-standing debate between principals and contract manufacturers about which party can take the domestic production deduction under tax code Section 199 based on who has the benefits and burden of owning the good being produced.

The proposal “disregards the statutory requirements of ownership,” George Manousos, a partner at PricewaterhouseCoopers LLP, told Bloomberg BNA Aug. 26, comparing it to saying a tailor owns the suit he is altering. “They are completely following instructions and just providing a service.”