When a new tax incentive is introduced to taxpayers, there is often confusion about what to call it. This is especially true with the Domestic Production Activities Deduction (DPAD). This incentive was first introduced in 2005 and was intended to benefit taxpayers that manufacture their products in the United States. This led many to assume that the deductions only applied to manufacturers. As a result, the DPAD became known as the “Manufacturer Deduction” or “U.S. Producer Deduction.”
However, the original intent of the law was broader than that, which meant that other types of businesses would be able to take advantage of this deduction. Congress’ intention - and how the law reads - is to provide tax breaks for companies that manufacture, construct, design, grow, or extracts their goods in the U.S. It is designed to encourage job growth and production in the U.S.
For companies and their shareholders, the DPAD can result in an additional 3.5 percent reduction of their overall tax rate.
It is important to note that a company could have a portion of its business performing these activities, in which case the net income related to these activities would qualify for the incentive. Many companies are surprised to learn this, as they are often under the impression that all of their activities need to qualify.
Here are five scenarios to consider in order to determine whether you qualify.
- Contract Manufacturing – Taxpayers that design their own products and then send them out to a third party to manufacture may be entitled to this incentive. Depending on the terms of the contract manufacturing arrangement, if the taxpayer maintains some of the benefits and burdens of the property during manufacturing, they may be entitled to this incentive.
- Construction Activities – The construction industry also benefits from this incentive if the taxpayer is involved in the construction of residential and commercial buildings and the related structural components. It also applies to inherently permanent structures and land improvements like waterways, docks, and underground pipe and electrical work.
- Engineering and Architectural Services – Taxpayers that perform engineering and architectural services in the United States for construction projects would also qualify. Architectural and engineering services include consulting, preparing drawings, evaluation, planning, design, or supervision of construction to ensure compliance with the designs and plans.
- Food and Beverage Sales – Business that prepare food and beverages at a facility (other than retail) that are sold at wholesale would also qualify for this incentive. This includes micro-breweries that sell wholesale, and food processing.
- Distributors – Although distribution alone will not qualify for this incentive, many distributors are looking for a competitive edge and have begun developing and selling their own product lines. Some are offering value-added services by packaging and selling products in different shapes and sizes to their customers. Some of these activities may qualify for this incentive.
The United States has some of the highest individual and corporate tax rates in the world. The DPAD is a valuable tax incentive that provides U.S. companies an opportunity to maintain their operations in the United States and still be competitive with the global economy. No matter your industry, take a fresh look at all of your revenue streams to determine if any may qualify for this incentive. Companies are often surprised to learn that all or a portion of their business qualifies.
Carlo R. Ferri can be reached at Email or 215.441.4600.
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