Senators propose fix to IRS code to promote manufacturing jobs
U.S. senators Sherrod Brown, D-Ohio, Rob Portman, R-Ohio, and Debbie Stabenow, D-Mich., last week introduced legislation to clarify Congress’ intent that Internal Revenue Service (IRS) rules on tax deductions for income from domestic manufacturing also should apply to contract manufacturing.
Congress added the Domestic Manufacturing Deduction to the Internal Revenue code as part of the 2004 Jobs Act in an effort to encourage U.S. manufacturing and domestic job creation. The deduction reduces the tax liability of companies that manufacture products in the United States. The law clearly applies to vertically integrated manufacturers, but the IRS has interpreted it in a way that doesn’t benefit companies that outsource some production to other domestic firms.
The bipartisan bill, S. 3517, would eliminate the disparate treatment of manufacturers by making clear that any company using a subcontractor that makes a “substantial” contribution to the production of goods is entitled to claim the deduction. Substantial contributed is defined as providing more than 50 percent of the direct material costs of the product.
Brown, Portman and Stabenow come from states that have suffered declines in manufacturing jobs in recent decades and that voted for Donald Trump, who promised to revive the manufacturing sector by reorienting U.S. trade policy to limit imports and penalize countries that violate trade agreements. Brown and Stabenow have been very critical of U.S. trade policy for what they say has been lack of political will to uphold higher standards for protection of labor rights.
“This legislation will help ensure our tax code encourages good-paying manufacturing jobs right here in the United States,” Portman said in a statement. “The IRS’s interpretation of the section 199 regulations has resulted in unnecessary disputes and litigation between the IRS and contract manufacturers and, as a result, it has diminished the law’s intended purpose of promoting more American manufacturing. This bill will end those disputes so that businesses can get back to focusing on creating more jobs.”
Tax code tweak
