Your Construction Activities may Qualify for DPAD
Section 199 of the Internal Revenue Code allows a 9% tax deduction of income from qualified production activities called the Domestic Production Activities Deduction (DPAD). This deduction has also been called the manufacturing deduction as it was put in place in 2004 and intended as a tax break for domestic manufacturers in the U.S. Section 199 also allows the deduction for activities constituting construction of real property in the U.S. Construction for this purpose is defined as activities performed in connection with a project to erect or substantially renovate real property.
The regulations go further into specific activities that qualify as construction for purposes of the DPAD deduction. For example, land improvements, landscaping and painting activities constitute construction activities for DPAD if performed in connection with other activities that erect or substantially renovate real property. These activities do not need to all be performed by the same taxpayer to qualify for DPAD. So as a subcontractor on a project that is either new construction or a substantial renovation could have their activities qualify for the deduction just because they are playing a part of the overall construction project. Most people think that only a homebuilder or a commercial general contractor would only qualify for the deduction or that only “one” taxpayer can qualify but this is not the case. A significant construction or renovation project could see quite a large number of companies providing services on the job qualify for the DPAD deduction on the same project.
Calculating the Deduction
The deduction is limited to the income produced by the above qualifying activities. Income from qualified production activities is calculated as domestic production gross receipts (DPGR) less cost of goods sold and other expenses that are directly allocable to production of DPGR. Income and expenses that are not directly related to qualifying activities will need to be backed out of the calculation for qualified production activity income (QPAI). The lesser of the QPAI or taxable income is multiplied by 9% to arrive at the deduction amount.
The deduction is also limited to 50% of W-2 wages paid to employees. Companies that do not have W-2 employees will not qualify for the deduction.
Contractors and subcontractors out there, are you missing out on this valuable tax break? Contact your trusted advisor at Apple Growth Partners, or me, for more information on whether your company can qualify for this tax savings opportunity.