Are You Overlooking This Significant Tax Deduction?

Political rhetoric aside, there’s no question that building products in the United States is good for the country and its workers. It can also be very good for your company in terms of your income tax obligation. The Domestic Production Activities Deduction (DPAD), also referred to as Section 199, went into effect in 2005, but is often overlooked.

This tax incentive was implemented to encourage companies of all sizes to manufacture in the United States. DPAD reduces the federal taxable income of domestic manufacturers by 9 percent, and is reported on the rather complex Form 8903. This form can be submitted by individuals, corporations, cooperatives, estates, and trusts that are engaged in income-producing activities that qualify as trades or businesses.

As with most income tax topics, the IRS’ rules and exceptions for claiming the DPAD are complicated, and its calculation can be quite daunting. For example, you must determine whether your Domestic Production Gross Receipts (DPGR) qualify on an item-by-item basis. You can’t simply claim the work produced by an entire division or product line.

Even if you’re not shipping any of your production work overseas, the fruits of your employees’ labor may or may not qualify for a Section 199. The IRS specifies that you can only claim the gross receipts derived from specific activities performed in the U.S. For example, if you have a construction business, you can claim receipts from the construction of real property. If your business provides engineering or architectural services for such construction, your work would be deductible.

Further, you may be eligible if you lease, rent, license, sell, or exchange:

The premise of the DPAD may be simple-produce in the U.S. and get a tax break-but understanding it and claiming it on the Form 8903, as you can see, can be a challenge.  You don’t want to include it with your tax forms if you’re not eligible, and you certainly don’t want to miss out on it if you can take advantage of it.