In the past year, there have been several developments concerning the application of the IRC §199 Domestic Production Activities Deduction ("DPAD"). The DPAD provides eligible taxpayers a deduction of up to 9% of their taxable income from qualifying production activities. Many of these recent developments provide guidance on the types of activities that qualify as "manufacturing or production" for purposes of the DPAD. Taxpayers currently not claiming the DPAD should review their position in light of these rulings.
The DPAD enables domestic manufacturers and producers to deduct for the tax year 9% of the lesser of:
- The taxpayer's qualified production activities income ("QPAI"), or
- The taxpayer's taxable income (modified adjusted gross income, for individual taxpayers), without regard to the DPAD.
The DPAD cannot exceed 50% of the W-2 wages from domestic production activities of the taxpayer. Under (2) above, taxpayers with an overall net loss receive no DPAD benefit.