Do you qualify for the production deduction?
Posted On: 7-8-2015 | Posted By: Deb Harrington, CPA
For more than a decade, federal law has allowed certain businesses to take a tax deduction for income attributable to domestic production activities. It’s a deduction that many qualifying businesses miss. If you’ve never taken the domestic production activities deduction (DPAD, for short), it might be time to review your operations to determine if you qualify.
What is the tax deduction?
Congress implemented the tax deduction as part of the American Jobs Credit Act of 2004, and it is now part of Internal Revenue Code Section 199.
Generally, if your business income qualifies, up to 9 percent of qualified production activities income (QPAI) for the taxable year can be deducted on the tax return. The deduction cannot, however, exceed 50 percent of the W-2 wages paid.
The calculation is made at the entity level. C-corporations can take the deduction from the corporate tax return, while owners of pass-through entities take the deduction on individual returns. Income from a Schedule C or F business might qualify as well as long as there are employee wages.
What activities are considered domestic production?
Domestic production gross receipts are derived from any lease, rental, license, sale, exchange, or other disposition of a qualifying production property (QPP) that is manufactured, produced, grown, or extracted (MPGE) in whole or in significant part within the United States; construction performed in the US; or engineering or architectural services performed in the US for construction projects in the US.
- manufacturing, producing, growing, extracting, installing, developing, improving and creating QPP;
- making QPP out of scrap, salvage or junk material as well as from new or raw material by processing, manipulating, refining, or changing the form of an article or by combining or assembling two or more articles;
- cultivating soil, raising livestock, fishing and mining minerals; and,
- storage, handling, or other processing activities, other than transportation, within the US.
This means that all kinds of businesses outside of the traditional manufacturing industry can qualify for the domestic production deduction, including farming, construction, computer software development and engineering.
How do I know if I qualify for the tax deduction?
As you might guess, determining whether a taxpayer qualifies for the deduction under Section 199 is not simple. Each activity within a business has to be reviewed separately when determining if it qualifies.
If you have never taken this deduction before, you have started a new business, or your current business has had losses in the past but now shows a profit, it might be time to reassess the deduction’s applicability. We have qualified associates who can assist you in making that determination. Recent clarifications to Section 199 mean those who might not have qualified for DPAD previously might now be allowed to take the deduction.
Contact your WK advisor at (573) 442-6171 or (573) 635-6196 to discuss whether this deduction might apply to you.