Q: You’re a builder, so why would you get the Domestic Production Activities Tax Deduction?
A: Because you produce something. (it’s not just for manufacturers)
What is it?
The deduction is 9% of net income from qualified “production” activities (not just traditional manufacturing) in addition to ordinary and necessary tax deductible expenses.
Construction of real property in the U.S. is eligible for the deduction. This includes:
- New buildings; residential or commercial
- Major renovation that significantly extends the life of buildings; residential or commercial
- Permanent improvements (such as swimming pools and parking lots);
- Permanent structures (such as boat docks, raised paths, etc)
- Infrastructure such as roads, sewer/septic, sidewalks
Note: Real property does not include machinery unless it is a “structural component” such as an elevator.
Examples of businesses that may be eligible include:
- Residential remodeling and general contractors
- Commercial/Govt. building construction contractors
- Architects and engineering firms
- Foundation, structure and building exterior contractors; structural steel and precast concrete contractors; electrical, plumbing, heating and air-conditioning contractors.
Examples of related businesses NOT eligible:
• Delivery of construction materials
• Rubbish and debris removal
• Other ancillary services not in construction and design
The bare basics of the calculation. It is the lowest of:
- Net Income from Domestic Production Activities. This number incorporates all related deductions;
- The total Net Income of the Entity. Note: this can be lower than #1 because the other parts of the business may be in a loss position;
- 50% of W-2 wages directly allocable to DPAD activities.
How can you tell if you’re getting this deduction?
• Your business tax return will include Form 8903;
• If you file as a Schedule C, your personal tax return will include Form 8903.
- Internal accounting must accurately allocate Production Activities and other activities, both revenue and expense. This includes:
- Payroll expenses;
- Indirect expenses such as selling expenses;
- The calculation and form itself are not for casual or street corner tax preparers.
If your business is engaged in any of the businesses listed above, you have adequate records, and you do not have a Form 8903 included in your tax return, you may want to inquire of you tax professional, “Why not?”. There may be a reason. There may be an opportunity to better your tax situation.