40.24 Qualified Production Activities

The law takes a broad view of the type of activities that can qualify for the domestic production activities deduction. These include not only traditional manufacturing, but also:

  • Selling, leasing, or licensing items manufactured, produced, grown, or extracted in the U.S.
  • Selling, leasing, or licensing films produced in the U.S.
  • Construction in the U.S. Construction includes both erection and substantial renovation of residential and commercial buildings.
  • Engineering and architectural services relating to a construction project performed in the U.S.
  • Software developed in the U.S., regardless of whether it is to be purchased off the shelf or downloaded from the Internet. The term “software” includes video games. But, with some minor exceptions, the term does not include fees for online use of software, fees for customer support, and fees for playing computer games online.

Safe harbor.

The deduction is limited to activities in whole or “significant part” in the U.S. Under a safe harbor, a taxpayer is treated as having manufactured, produced, grown, or extracted property in “significant part” within the U.S. if direct labor and overhead costs incurred within the U.S. account for at least 20% of the total cost of the property. But even if you cannot meet this safe harbor, you may rely on the facts and circumstances to demonstrate that a significant part of the activities are in the U.S.

The following activities are specifically not qualified ...

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