Originally Published on forbes.com on September 10th, 2011
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Code Section 199 allows a deduction of 9% of “qualified production activities income”. The deduction is limited to taxable income. The deduction relates to a fairly broad range of domestic activities:
lease, rental, license, sale, exchange, or other disposition of qualifying production property which was manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the United States.
It also relates to films, production of electricity, natural gas and potable water, construction in the United States and related engineering and architectural services.
Besides the taxable income limitation, there is another limitation. The deduction is limited to 50% of W-2 wages. A business that leans heavily on independent contractors may bump against that limit.
The 9% deduction is probably not enough to influence somebody who likes using independent contractors to start switching to W-2 employees. I’m wondering if the payroll tax holiday and credits in the jobs bill might make things look different. Regardless, if the bill passes, businesses that heavily use independent contractors should consider the possibility of increasing their Section 199 deduction by switching some contractors to W-2 employment.