The domestic production activities deduction (DPAD) was eliminated in 2018 by the Tax Cuts and Jobs Act, but you may still be able to claim it on previous tax years 2016 and 2017 via an amended return
The new tax law, known as the Tax Cuts and Jobs Act (TCJA), was signed by President Trump in late 2017 and went into effect at the beginning of 2018. The TCJA made many changes to tax law, including an expansion of the standard deduction and child tax credit, and removal of credits like moving expenses. The alternative minimum tax was also altered, and higher expensing limits were implemented for businesses.
Alongside these changes was the removal of the domestic production activities deduction (DPAD). This was a big deduction for home builders and contractors, as it provided tax incentives for U.S. businesses that produce most goods here, rather than distributing work overseas.
What follows is an overview of DPAD – what the deduction is for, what can be claimed, and how you can still benefit from DPAD by acting fast.
What is DPAD?
DPAD applied to both small and large businesses and was in effect from 2005 to 2017. The deduction can be claimed by any company that manufactures, grows, extracts produce, develops, or improves goods primarily in the United States. This includes construction, architectural, or engineering activities, as well as things like film and video production.
One main factor in calculating the DPAD you can claim is your domestic production gross receipts (DPGR). This includes receipts from domestic tangible personal property, which is a property that was made or produced by your business in the U.S. tangible personal property could be:
- computer software or programs
- sound recordings
- printing presses
- transportation or office equipment
- testing equipment
- display racks and shelves
- machinery (that isn’t a structural component)
However, all activities aren’t included. Excluded services from DPAD include:
- cosmetic construction services, such as painting
- leasing or licensing activities or items to an associated party
- selling food or beverages prepared at a retail establishment
According to the IRS, DPAD is usually 9 percent or the smaller of:
- your qualified production activities income, or
- your adjusted gross income for an individual, estate, or trust (taxable income for all other taxpayers) figured without the DPAD.
Your business will only qualify if it has employees since the deduction is intended to increase production and employment across the nation.
Also worth noting, you can only deduct half of what you pay to workers, and the deduction can’t exceed your company’s taxable income. For S corporations, partnerships, LLCs, and sole proprietorships, the deduction has to be limited to your adjusted gross income.
DPAD was effectively eliminated beginning January 1, 2018, by the TCJA. So, the last year you can claim DPAD on your taxes is 2017.
Can I still claim DPAD for 2017?
The good news is that if you didn’t claim this deduction on your 2015 (if you’re within your three-year window detailed below), 2016, or 2017 taxes, you can still do so by filing an amended return.
And you will want to seriously consider this deduction if you haven’t claimed it for those years. The average cash value you could see is $20,000, ranging between $8,000 and $100,000, so it’s worth a second look.
You’ll need to act fast if you do decide to amend a previous tax return. The IRS says that you have three years from the submission of the original return to file an amended version or two years after you paid the tax, whichever is later. Your best bet is to talk to a tax professional who can help you get your amended tax return filed right away.
While losing the DPAD is a loss for builders in the U.S., remember that tax law is always changing. The Tax Cuts and Jobs Act is set to expire at the end of 2025, too, so DPAD could always return in the future.
Our professionals at No Boundaries Advisors would be happy to discuss amending your tax returns to take advantage of applicable deductions. We found that roughly 80 percent of our prospects did not take the DPAD when they could have. That’s why it’s always important to talk to a tax professional who can ensure you’re claiming every deduction you’re eligible for.
If you are interested in amending your 2016 or 2017 tax return to take advantage of thousands of dollars in value, contact our team for a consultation to learn more. We’re happy to sit down with you and review your specific situation.