Does my business qualify for the Domestic Production Activity Deduction?

Taking advantage of the Domestic Production Activity Deduction (DPAD) is smart tax planning. However, it is a very complex calculation and business accounting systems are not usually set up to track Domestic Production Gross Receipts and Domestic Production Activity Income. This post is provided as a starting point for the business owner(s) to help discern whether their business may qualify for this valuable deduction.

If your business produces Qualified Production Property then it is quite possible your business can qualify to claim the deduction. Qualified Production Property is manufactured, produced, grown or extracted by the taxpayer in whole or in significant part within the United States. It is tangible personal property, computer software, sound and film or video recordings that do not contain sexually explicit conduct.

Since the last three items on the list are fairly self explanatory that leaves the question of, ‘what types of businesses produce tangible personal property?’ First, it should be explained that unlike most other parts of the tax world, tangible personal property includes real property, but not land, therefore, houses, buildings and other structures. Specifically mentioned as qualifying are engineering and architectural services. While this also includes any business involved in the construction of real property, it does not include such businesses that only perform cosmetic work such as painting.

Excluded businesses are businesses involved in the sale of food and beverages prepared by the taxpayer at a retail establishment, the transmission or distribution of utilities or the lease, rental, license, sale, exchange, or other disposition of land. However, businesses involved in the production of electricity, natural gas, or potable water (collectively, utilities) are included. So, for instance, the business that extracts natural gas is included, but the utility company that pipes the gas to your home is not.

The DPAD can mean valuable extra cash flow to the right business. There are parameters that limit the amount of the deduction but it can be as much as nine percent of a business’ payroll for 2010, 2011 and beyond. It was worth three percent in the case of taxable years beginning in 2005 or 2006, and six percent in the case of taxable years beginning in 2007, 2008 or 2009.

If you believe your business may qualify or should have qualified for this deduction, contact 1040 Wealth Designs, LLC. We will provide a free analysis of your last three years’ tax returns and search for those valuable deductions, such as DPAD, that are often overlooked.

About this Author 

John Beidle is an enrolled agent who specializes in helping entrepreneurs, small business owners and real estate investors pay the least amount of tax as legally possible.

About The Author

John Beidle

John Beidle is an enrolled agent who specializes in helping entrepreneurs, small business owners and real estate investors pay the least amount of tax as legally possible.

1 Comment

  • Tessa

    November 20, 2011

    Your article perfectly shows what I nedeed to know, thanks!