The Domestic Production Activities Deduction (DPAD): A Valuable Benefit for Contractors, Architects, Movie Makers, and Manufacturers

Don’t miss out on this 9% deduction just because it seems complicated.

For many businesses, the Domestic Production Activities Deduction isn’t as difficult as it may initially appear. Here’s a simple breakdown of how to claim it using tax software:

1. Start by Inputting Deductions: Whether you’re operating as a C-Corporation or a pass-through entity, begin at the “Deductions” input screen in your tax software. Find the section labeled “Qualified Domestic Production Activity” below the regular deductions. Select an “Allocation Method.”
2. Choose the Right Method: If your annual gross receipts are $5 million or less, choose the “Small Business Simplified Overall Method.” From there, review the forms generated to see your results.

• For C-Corporations, check Form 8903.
• For pass-through entities, check the K-1 forms.

3. Understanding the Key Figures:

• C-Corporations: On Form 8903, Line 8 should show your net profit, and Line 16 will reflect the wages your corporation paid.
• S-Corporations: For your K-1 forms, the combined amount on Line 12Q will be your net income, and the combined amount on Line 12R will be the wages paid by the corporation.
• Partnerships: Net income is reported on Line 13U, and wages on Line 13V.

For pass-through entities, the easiest approach is to take this information from your K-1 and input it into a shareholder’s or partner’s individual tax return. The software will automatically generate Form 8903 for that individual, where the net income will appear on Line 8 and wages on Line 16.

4. How the Deduction Works: For most businesses, this is all the input you need. Form 8903 will automatically calculate 9% of the net income and place it on Line 13. It will also ensure the deduction is limited to less than half of the wages paid (Line 25). That’s all there is to it!
5. Understanding Additional Lines on Form 8903: What about the other lines on Form 8903? The easiest way to understand them is to let your tax software do the work. If you decide to use other allocation methods or override certain values (like gross receipts, cost of goods sold, or regular expenses), your deduction may decrease but will never increase.

The Simplified Deduction Method can be used for businesses with gross receipts of $100 million or less or total assets of $10 million or less. Every company can also use the Section 861 method. However, a common glitch in tax software is that if you input a figure for domestic production gross receipts, you must also manually input a figure for wages. Otherwise, the software may generate a zero deduction.

6. Special Considerations for Oil Producers: The oil-related production activities column will affect very few taxpayers, primarily large oil companies. Oil producers receive a 3% lower deduction, which is detailed in lines 14a and 14b of Form 8903.
7. What Counts as “Domestic Production Activities”? Domestic production activities aren’t limited to manufacturing. It includes:

• Construction of real property in the U.S.
• Engineering or architectural services performed for U.S. property construction
• Production of qualified films
• Production of electricity, natural gas, or potable water in the U.S.

If any of these activities are performed partially in the U.S. and partially abroad, you’ll need to enter this information into your software to calculate your deduction. While this adds some complexity, it’s well worth the effort for the 9% deduction.

Need Help? We’re Here for You.

As your CPA, we are committed to guiding you through the process of claiming this valuable deduction. If you have any questions or need assistance, don’t hesitate to reach out.

Contact Us Today:

• Phone: 323-902-1000
• Email: dmitriy@losangelescpa.org
• Website: www.losangelescpa.org