Domestic Production Activities Deduction – Do You Qualify?

If you own a business that produces something in the United States you may be eligible for the Domestic Production Activities Deduction also known as DPAD. Businesses engaged in any of the following activities should review their tax returns for this deduction.

What are qualifying activities?
• manufacturing, production, or growth of tangible personal property, in whole or in significant part within the U.S.;
• construction of real property in the U.S.; and
• performance of engineering or architectural services in the U.S. in connection with real property construction projects in the U.S.
Pure sales and service activities are not eligible for this deduction, unless the services are in the construction, engineering, and architectural industries.

Who can claim it? The deduction is available to all taxpayers – individuals, C corporations, farming cooperatives, estates, trusts, and their beneficiaries.

How much can I deduct? The DPAD is equal to 9% of the businesses net income derived from eligible activities, it is limited to the taxpayer’s taxable income for the year.

What else should I know? There is a lot more to the DPAD, for example, determining whether your particular business activities are eligible, how to compute the net income from activities that are eligible, and how to determine the amount of the deduction when you have income from both eligible and ineligible activities.

The DPAD rules are complex and the IRS published guidance is not user friendly. Contact an MKS&H tax advisor and let us review whether DPAD applies to your business, and, if so, how best to take advantage of it.

Article contributed by Jennifer Milas, CPA, MST, MKS&H Tax Manager

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 putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.

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