If you haven’t heard of the “DPAD” you might just be missing out on a promising tax deduction. It’s called the Domestic Production Activities Deduction (DPAD) and benefits owners of businesses that engage in any of the following activities:
- The manufacture, production, or growth of tangible personal property, in whole or in significant part within the U.S.;
- The construction of real property in the U.S.;
- The performance of engineering or architectural services in the U.S. in connection with real property construction projects.
The DPAD is available to all taxpayers including individuals, C corporations, farming cooperatives, estates, trusts, and their beneficiaries. The deduction is equal to 9% of the net income derived from eligible activities, but is limited to your taxable income for the year. Also, it can’t exceed 50% of the W-2 wages paid to employees for the year.
There are a lot of specifics to the DPAD including determining whether your particular business activities are eligible for the deduction, how to compute the net income from activities that are eligible, and how to determine the amount of the deduction when you’ve got income from both eligible and ineligible activities.
The overall statutory rules are complicated, and the IRS has issued equally complex guidance on those rules. It’s best to discuss with your MKS&H tax advisor about whether DPAD applies to your business, and, if so, how to take advantage of it.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by advising them regarding their financial, technology and human capital management needs.