Section 199 Domestic Production Activities Deduction

As tax time approaches, don’t forget to ask your accountant about the “Domestic Production Activities Deduction” (DPAD).  This deduction can provide a significant tax break for businesses that qualify.

The DPAD provides for a deduction equal to 9% of the net income from eligible activities, subject to certain limitations.  Among the more common eligible activities are:

• the manufacture, production, or growth of tangible personal property, in whole or in significant part within the U.S.
• the construction of real property in the U.S.
• the performance of engineering or architectural services in the U.S. in connection with real property construction projects in the U.S.

Construction activities are eligible for the deduction, but only if the construction is of real property performed in the U.S. The real property may consist of residential or commercial buildings, permanent structures (like docks and wharves), permanent land improvements (like swimming pools and parking lots), oil and gas wells, platforms, and pipelines, and infrastructure (like roads, sewers, sidewalks, and power lines). Real property doesn’t include machinery unless it’s a “structural component”—for an example, an elevator. Examples of businesses conducting eligible construction activities are residential remodelers, commercial and institutional building construction contractors, foundation, structure, and building exterior contractors, structural steel and precast concrete contractors, electrical, plumbing, heating, and air-conditioning contractors.

Engineering and architectural services are also eligible for the deduction, but only if they’re performed in the U.S. for real property construction projects in the U.S. Eligible engineering services include consultation, investigation, evaluation, planning, design, and supervision of construction. Eligible architectural services include consultation, planning, aesthetic and structural design, and supervision of construction.

There’s a lot more to the DPAD deduction—for example, determining whether your particular business activities are eligible for the deduction, how to compute the net income from activities that are eligible, and how to determine the amount of the deduction when you’ve got income from both eligible and ineligible activities. The statutory rules are complicated, and IRS has issued voluminous—and equally complex—guidance on those rules. If you are not taking advantage of this deduction, or not sure if you qualify, you should contact your tax advisor.

Nick specializes in audit, accounting, tax and consulting services for clients in manufacturing, construction contracting, condominium and other realty associations, legal, engineering, and other professional services organizations. He can be reached at (973) 328-1825.