The domestic production activity deduction (DPAD) is a provision enacted in the American Jobs Creation Act of 2004 that is often missed by both veteran and rookie tax preparers. Businesses that have qualified production activities are entitled to a 9% deduction for those activities.

What is a qualified production activity? The deduction was enacted to create jobs so the activity must be conducted in the USA. The following activities conducted in the U.S. qualify for the DPAD:

  • The manufacture of tangible personal property.
  • The production of sound recordings.
  • Software development.
  • The production of electricity, natural gas or water.
  • Selling, leasing, or licensing items manufactured, produced, grown or extracted in the U.S.
  • Processing and preparation of food products for sale at wholesale.
  • Construction including both new buildings and substantial renovation of residential and commercial buildings.
  • Engineering and architectural services relating to a construction project.

What is not a qualified activity?

  • Construction that is cosmetic in nature such as painting.
  • Preparing and selling food at a retail establishment.
  • Leasing or licensing items to a related party.

A few specific examples of clients we have that have qualifying activities would be road construction, electricians, plumbers and other trades involved in construction, steel fabrication, farming, graphic printers, architectural services, processing dry beans for wholesale, growing landscape plants, software developer, and the list goes on.

The two limitations are the deduction cannot exceed 50% of the wages paid (payments to independent contractors do not count), and may not exceed 9% of adjusted gross income if filing as an individual (sole proprietors, partnerships, S corporations), or 9% of taxable income if filing as a C corporation.

Here is an example of how the DPAD would work for an Electrical Contractor:

Gross Receipts $800,000
Materials $250,000
Labor $380,000
Administration $80,000
Total Expenses $710,000
Net Income $90,000
DPAD – 9% $8,100
Taxable Income $81,900

If you think your business may have qualified activities but has not claimed the deduction you can amend your tax returns for any open years and claim the deduction. Contact Robert F. Murray and Company to see how we can help you take advantage of the DPAD and other deductions related to your business.