OK, so maybe it is not as exciting as a new iPad, but a dPad can be far more advantageous for taxpayers. DPAD, short for Domestic Production Activities Deduction is deducted under section 199 directly from income. For 2010, the deduction is equal to 9% of the lesser of of qualified production activities income (QPAI) or taxable income (AGI for individual taxpayers including shareholders of pass through entities) determined without regard to the deduction. This is an increase from tax year 2009, when the applicable percentage stood at 6%.
What are Domestic production activities?
If you build, manufacture or produce goods in the United States you may be engaged in domestic production activities. The following activities can generate QPAI:
The deduction does not apply to income derived from:
What is QPAI?
Section 199(c)(1) defines QPAI for any taxable year as an amount equal to the the excess of domestic production gross receipts (DPGR) over the sum of: (a) the cost of goods sold (CGS) allocable to such receipts; (b) other deductions, expenses, or losses directly allocable to such receipts; and (c) a ratable portion of deductions, expenses, and losses not directly allocable to such receipts or another class of income.
What are the limits?
The deduction is limited to 50% of the W-2 wages paid by the employer during the year. This is in addition to the QPAI and net income (or AGI) limitations.
How to claim the deduction
Form 8903 is used to claim the deduction. A corporation claims the deduction at the entity level. The deduction for the qualified production activities of a partnership or S corporation is taken at the partner or shareholder level. For simplification purposes, the partnership or S corporation can calculate the QPAI at the entity level and report pertinent information to the shareholder on Schedule K-1. Each partner or shareholder must compute its deduction separately using form 8903.
IRS Circular 230 Disclosure - Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
What are Domestic production activities?
If you build, manufacture or produce goods in the United States you may be engaged in domestic production activities. The following activities can generate QPAI:
- Construction of real property performed in the United States (U.S.A.)
- Engineering or architectural services performed in the U.S.A. for construction of real property in the U.S.A.
- Any lease, rental, license, sale, exchange, or other disposition of:
- Tangible personal property, computer software, and sound recordings the taxpayer manufactured, produced, grew, or extracted in whole or in significant part within the U.S.A.
- Any qualified film the taxpayer produced
- Electricity, natural gas, or potable water produced in the United States
The deduction does not apply to income derived from:
- The sale of food and beverages prepared at a retail establishment
- Property leased, licensed, or rented for use by any related person
- The transmission or distribution of electricity, natural gas, or potable water
- The lease, rental, license, sale, exchange, or other disposition of land
What is QPAI?
Section 199(c)(1) defines QPAI for any taxable year as an amount equal to the the excess of domestic production gross receipts (DPGR) over the sum of: (a) the cost of goods sold (CGS) allocable to such receipts; (b) other deductions, expenses, or losses directly allocable to such receipts; and (c) a ratable portion of deductions, expenses, and losses not directly allocable to such receipts or another class of income.
What are the limits?
The deduction is limited to 50% of the W-2 wages paid by the employer during the year. This is in addition to the QPAI and net income (or AGI) limitations.
How to claim the deduction
Form 8903 is used to claim the deduction. A corporation claims the deduction at the entity level. The deduction for the qualified production activities of a partnership or S corporation is taken at the partner or shareholder level. For simplification purposes, the partnership or S corporation can calculate the QPAI at the entity level and report pertinent information to the shareholder on Schedule K-1. Each partner or shareholder must compute its deduction separately using form 8903.
IRS Circular 230 Disclosure - Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
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