Domestic Production Activity Deduction (DPAD), known as Sec. 199 deduction, is an additional TAX DEDUCTION, NOT A TAX CREDIT, for businesses that conduct certain activities in the United States. The deduction for 2014 is limited to 9% of the lesser of qualified production activities income (QPAI) or taxable income for the year, determined without the DPAD. In the case of pass-through entities, the DPAD limitations are applied at the shareholder or partner/member level. The allowable deduction cannot exceed 50% of the allocable W-2 wages.
The following activities are generally considered as Qualified Production Activities:
- Construction of real property that was performed in the United States.
- Engineering or architectural services performed in the United States for construction of real property in the United States.
- Any lease, rental, license, sale, exchange or other disposition of any of the following:
- Qualifying production property (e.g. tangible personal property, computer software and sound recordings) you manufacture, produce, grow or extract in whole or in significant part in the United States;
- Any qualified film you produced; or
- Electricity, natural gas, or potable water you produced in the United States.
The deduction is calculated and reported on Form 8903, Domestic Production Activities Deduction, or on Schedules K-1 for pass-through entities.
The DPAD calculation can be complicated and confusing. Please contact Watkins Meegan, a division of CohnReznick, to learn about more about DPAD and find out if your business can be benefited from it.