United States

IRS directive identifies nonqualified activities for section 199 deduction

Guidance clarifies manufactured, produced, grown or extracted definition


The IRS has issued a directive to its examiners on which types of activities meet the definition of “manufactured, produced, grown or extracted” (MPGE) for purposes of the domestic production activities deduction (DPAD) under section 199. On March 16, 2015, the Large Business and International division of the IRS (LB&I) issued directive LB&I-04-0315-001 in order to further clarify the MPGE definition provided under Reg. section 1.199-3(e).

Generally, section 199 provides for a deduction for the income attributable to a taxpayer's qualified production activities. A taxpayer must satisfy a number of requirements to be eligible for the deduction; at issue in the present directive is the requirement that the taxpayer demonstrate that it had manufactured, produced, grown or extracted the otherwise qualified production property in whole or in significant part within the United States. The directive provides that all other requirements delineated in the code and the regulations are still applicable and that the guidance is intended solely to aid examiners in determining whether certain activities meet the MPGE definition.

A taxpayer may not claim DPAD when an activity is not within the MPGE definition. The IRS has provided the following examples of activities performed at a retail level that are generally considered to fall outside the MPGE definition and, as such, are ineligible for DPAD:

  • Cutting blank keys to a customer's specification
  • Mixing base paint and a paint coloring agent
  • Applying garnishments to cake that is not baked where sold
  • Applying gas to agricultural products to slow or expedite fruit ripening
  • Storing agricultural products in a controlled environment to extend shelf life
  • Maintaining plants and seedlings

The directive acknowledges that other similar activities may fall outside the MPGE definition but that all activities should be judged on the specific facts and circumstances of the taxpayer's activities, the processes under which the activities are performed, and the taxpayer's specific industry. 

This guidance is helpful for taxpayers who are questioning whether their activities meet the MPGE definition. The taxpayer, with the assistance of a qualified tax professional, should analyze any similar activities in their business in light of this clarifying directive in order to determine whether the activity falls within the MPGE definition.


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