Section 199 Guidance on Contract Manufacturing

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Fatmah Ettaher of UHY Advisors MI, Inc., discusses section 199 guidance on contract manufacturing.

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A directive has been issued by the Large Business & International Division (LB&I) simplifying the approach in determining who bears the benefits and burdens of ownership in a contract manufacturing arrangement to claim a deduction under section 199 (DPAD).

The taxpayer that has the benefits and burdens of ownership of the property in a contract manufacturing arrangement is entitled to the DPAD deduction. Examiners were previously instructed in a prior directive to evaluate as many as nine factors in a three-part test to determine who had the benefits and burdens of ownership.

According to the recent guidance from LB&I, examiners should not challenge a taxpayer claiming DPAD as long as the taxpayer provides three statements:

1.    Basis for determining that it had the benefits and burdens of ownership
2.    Certification signed by the taxpayer
3.    Certification signed by the other party to the contract manufacturing arrangement

Determining who bears the benefits and burdens of ownership is factually intensive and the recent guidance is an effort to reduce some of the controversy faced by taxpayers. The issued directive is effectively permitting the contracting corporation and the contractor to agree as to which of them will take the deduction granted the allocation is properly certified.

About UHY Advisors

UHY Advisors provides tax and consulting services to a variety of sectors. UHY LLP, a licensed CPA firm, provides audit and other attest services to public and private companies. UHY Advisors FLVS provides forensic, valuation, intellectual property, electronic discovery and international arbitration services to law firms and their clients. Many of these services grew from client business needs and their requests for assistance in a variety of areas of expertise.

UHY Advisors, operating in an alternative practice structure with UHY LLP, forms one of the largest professional services firms in the US. While that scale might provide confidence for some clients, others tell us our greatest value is the way we bring these resources to bear to help address today’s evolving business challenges. It’s a philosophy we call “The Next Level of Service”. To learn more visit

All of the above entities are members of UHY International, a global network of independent professional services firms that provide audit, tax and consulting services around the world. UHY International member firms comprise one of the top international accounting networks in the world. As a member firm, we provide our clients with resources in business centers strategically located around the globe. We are an active member in this organization with significant participation that brings the power of an international network to bear for our clients.

UHY Advisors, Inc. provides tax and business consulting services through wholly owned subsidiary entities that operate under the name of “UHY Advisors.” UHY Advisors, Inc. and its subsidiary entities are not licensed CPA firms. UHY LLP is a licensed independent CPA firm that performs attest services in an alternative practice structure with UHY Advisors, Inc. and its subsidiary entities. UHY LLP and UHY Advisors, Inc. are U.S. members of Urbach Hacker Young International Limited, a UK company, and form part of the international UHY network of legally independent accounting and consulting firms. “UHY” is the brand name for the UHY international network. Any services described herein are provided by UHY LLP and/or UHY Advisors (as the case may be) and not by UHY or any other member firm of UHY. Neither UHY nor any member of UHY has any liability for services provided by other members.

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Jessica Bollenberg
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