Made In America? Reap the Tax Benefits with the Domestic Production Activities Deduction

Manufacturing in the United States is on the rise over the last decade. The Bureau of Labor Statistics has shown about an 8% increase in manufacturing jobs since 2010. As one of the largest industries within our national economy, there are specific provisions in the tax code that benefit US based manufacturing.

Unfortunately, many small businesses don’t know about these tax breaks and aren’t able to take advantage of them. The Domestic Production Activities Deduction (DPAD) is one of those tax breaks.

Who Qualifies?

The DPAD was first implemented in 2005 as an incentive for investment in US manufacturing. It allows qualifying businesses to take a tax deduction on income earned from qualified production activities. Generally speaking, any business that sells something that was made within the US will qualify for this deduction. For example, the following activities qualify for the deduction:

• A clothing company selling clothing that was made within the US
• An orchard selling produce that was grown within the US
• An motion picture firm leasing or licensing one of its films that was produced within the US
• An engineering or construction firm performing services with the US
• A software company developing programs within the US, including gaming companies

How is it Calculated?

The tax deduction is based on Qualified Production Activities Income, which is basically any income resulting from the qualifying activities. For example if a company is selling a smartphone that was manufactured within the US, all of the income resulting from selling that product would be qualified. Any expenses related to the qualifying activity (e.g. the costs associated with making the smartphones) will reduce the qualifying income. The Qualified Production Activity Net Income is then multiplied by 9% to determine the deduction amount. However, the deductible amount is limited to 50% of a taxpayer’s reported wages for the year.

Domestic Production Activities Deduction – An Example

ABC Company manufactures fertilizer within the US. This is a qualifying activity. Total income from this activity is $700,000. The cost of manufacturing the fertilizer is $250,000. ABC Company’s reported wages for the year total $80,000. The company’s net income derived from qualifying activities is $450,000. The calculated DPAD is $40,500. However, the 50% wage limitation is $40,000. In this example, ABC Company would only be able to deduct $40,000 for the DPAD.

How do I Claim the Deduction?

The deduction is claimed by filing Form 8903 with your tax return. This return calculates the deductible amount and is attached to the corporate income tax return. Another great thing about this deduction is that it flows through to any taxpayer invested in partnerships or S corporations, so this deduction is available to individuals as well.

 
If you think you qualify for the DPAD, give us a call and we can discuss the specifics of your manufacturing business and how we can help minimize your income taxes.

Contact us for guidance and application to your individual situation →