As some of you might be aware, the IRS allows taxpayers to claim a deduction for cost related to domestic production activities (DPAD). This deduction is available to certain individuals, cooperatives, corporations, estates and trusts that work in qualified trade or business activities. For S Corporations, Partnerships, estates and trusts, the deduction is calculated on the respective tax return and then passes thru on the K-1 to the individual or beneficiary.
An activity qualifies as a trade or business activity only if you are engaging in this activity for a profit motive and work in the business regularly and if is in the United States. It does not include a business classified as a hobby. Also, If some of your income is related to outside of the U.S., then this is adjusted out of the calculation.
There are various types of business that qualify for this deduction as follows:
- Selling, leasing or licensing items manufactured, produced, grown or extracted
- Selling, leasing or licensing motion pictures
- Production of sound recordings and certain films
- Construction services including building and renovations of residential and commercial properties
- Engineering and architectural services related to construction projects
- Software development including developing video games
- Production of electricity, gas or water
If you are not sure if your business might qualify, contact your accountant or give us a call.