Domestic Production Activities Deduction

The Domestic Production Activities Deduction (DPAD), also known as Section 199, is a tax break for businesses that perform domestic manufacturing or other qualifying production activities. This deduction is designed to encourage domestic production, increase employment, and discourage companies from moving production overseas. The DPAD is based on qualified domestic production gross receipts, which is the taxpayer’s total gross receipts reduced by the cost of goods sold and other expenses that are allocable to the DPGR. However, the DPAD only applies to income that is derived from domestic production activities and not income from other sources.

How to Claim DPAD?

To claim the DPAD, a company must meet certain requirements and maintain accurate accounting records. Your business must have at least one employee who is employed at your qualified production activity. It must also meet certain income, wage, and benefit limits. Generally, the DPAD is limited to 50% of the wages paid to employees allocated to qualifying production activities. You must also submit Form 8903 to calculate the deduction. The DPAD can be claimed by C corporations, S corporations, Partnerships, LLCs, and estates and trusts. It can also be claimed by the owners of those entities who claim their share of DPAD on their individual tax returns. However, the DPAD can’t exceed your adjusted gross income for individuals or your corporation’s taxable income for corporations.

Whether you’re a construction contractor or another business, the DPAD can be an excellent way to reduce your tax liability. To learn more about how you can take advantage of this tax break, contact an Aprio advisor today. Our experts can help you determine if your business is eligible and how much you can save. We’ll ensure your accounting systems are properly set up to capture all your deductions. We can also ensure your records are complete and correct to help you avoid any unnecessary tax penalties.

Domestic Production Activities Deduction Repeal

It may seem like a long time ago when Congress enacted the domestic production activities deduction (DPAD). But, unfortunately, this incentive was repealed by the recent tax reform legislation.

The IRS recently issued an alert warning taxpayers against trying to secure missed DPAD benefits under the now-repealed provision. The alert also states that an overwhelming majority of such claims are unsupported and should be denied. The IRS warns that those who make these types of amended return claims may face penalties, referrals to the Office of Professional Responsibility, or even disciplinary action