Domestic Production Activities Deduction

[Reyed Mia (Apprentice, DIU)]

Domestic Production Activities Deduction

"Big Time Construction Corporation" made a significant profit this year resulting in higher taxable income than expected. Therefore, Big Time Construction Corporation is exploring opportunities to reduce their tax liability. As a construction contractor who builds or renovates real properties in the United States, the Company is eligible to take advantage of the IRC Section 199 deduction also known as The Domestic Production Activities Deduction ("DPAD").

What Activities Qualify as Domestic Production Activities?

Residential and commercial construction

Infrastructure improvements

Land preparation activities

In order for these activities to qualify for section 199 treatment, the gross receipts earned from these activities must meet two criteria. First, they must be earned thru the "ordinary course of trade or business" and earned from the "erection or substantial renovation of real property" in the United States.

So, what constitutes ordinary course of trade or business? For construction type activities, it can be the selling or exchanging of real property within 60 days of the property's completion date to unrelated parties. For renovation type activities, it must result in permanent improvements or betterments of a property.

Does the Domestic Production Activities Deduction Apply on the State Level?

Once the QPAI is determined and the taxpayer calculates the amount of the 9% deduction, the taxpayer is also subjected to a final limitation as noted above. The taxpayer must apply the Section 199 deduction to no more than 50% of W-2 wages paid to employees and officers. These wages must be associated with the generation of DPGR. Consequently, if there are no W-2 wages paid, then construction contractors are not eligible for the Section 199 deduction.

Some states disallow the DPAD. Relevant to the mid-Atlantic region:

States Allowed: DE, PA, VA

States Disallowed: DC, MD, WV

Construction contractors with substantial business income from the construction or renovation of real property in the United States should consider the Section 199 deduction to reduce taxes. A best practice for contractors eligible for the deduction would include maintaining accurate accounting records that separate income and expense statements related to domestic production from non-eligible amounts.

http://blogs.aronsonllc.com/construction-real-estate/2016/07/15/section-199-domestic-production-activities-deduction-counts/