The Domestic Production Activities Deduction Updated

The Domestic Production Activities Deduction (DPAD) isn’t new, it’s been available since 2005, but it has tripled in value since congress introduced it and many taxpayers don’t take full advantage of it.  Internal Revenue Code Section 199 allows qualified taxpayers a deduction equal to 9% of the lesser of their:

  • Qualified production activities income (QPAI) or
  • Taxable income

The deduction is only eligible for work done in the United States (domestic) and there are some limits, but it is a permanent tax benefit (not a timing difference) and it does not reduce any other deduction or credit item.

The name of the deduction alone suggests this deduction is only available to manufacturers, but that’s misleading.  Eligible activities include:

  • Film production,
  • Production of electricity, natural gas or potable water,
  • Construction or substantial renovation of real property, and
  • Engineering and architectural services

If your business operations are multifaceted, it’s possible to take the deduction for only the portion of your net income which is derived from qualified production activities.  It’s also important to know that a de-minimus rule applies which allows businesses to treat all of their income as QPAI if less than 5% of income in non-QPAI.

The DPAD is a powerful deduction, but to maximize its benefit may require a detailed review of your cost accounting structure.  Please contact your Anders advisor if you’d like learn more about how this deduction can improve your bottom line.