{"id":267,"date":"2017-12-23T16:16:19","date_gmt":"2017-12-23T20:16:19","guid":{"rendered":"https:\/\/www.saudercpa.com\/blog\/?p=267"},"modified":"2017-12-23T16:16:19","modified_gmt":"2017-12-23T20:16:19","slug":"the-free-expense-for-domestic-production-activities","status":"publish","type":"post","link":"https:\/\/www.saudercpa.com\/blog\/2017\/12\/23\/the-free-expense-for-domestic-production-activities\/","title":{"rendered":"The Free Expense for Domestic Production Activities"},"content":{"rendered":"

Preface: Optimizing the tax code\u00a0is in\u00a0a few\u00a0instances effortlessly simple. The domestic production activity,\u00a0remaining for the 2017 tax year, is one tax\u00a0attribute that can save some clients thousands + in\u00a0tax dollars.\u00a0The Tax Cuts and Job Act did not continue this “free” tax deduction, but for this years tax filing– here’s how it works.\u00a0<\/em><\/p>\n

The Free Expense for Domestic Production Activities<\/strong><\/p>\n

Credit: Jacob Dietz, CPA<\/em><\/p>\n

The domestic production activities deduction (DPAD) is a taxpayer-friendly part of the tax law that allows taxpayers to deduct an expense that cost them zero additional cash. It is a \u201cfree\u201d expense! The DPAD is going away with the passage of tax reform, but it is still available for open years before the tax reform takes effect. The American Jobs Creation Act of 2004 created this deduction, which allows certain taxpayers to deduct up to 9% of qualifying income as a DPAD, subject to certain limitations.<\/p>\n

What types of activities and industries qualify for the DPAD? Generally, agriculture, real property construction, and manufacturing qualify, as well as some other industries. Qualifying activities can include dairy farming, crop farming, metal fabrication, furniture making, general construction contracting, construction subcontracting, and the list could go on.<\/p>\n

Since the DPAD is 9% of qualifying income, it only applies if a taxpayer earns a profit. If the taxpayer shows a loss, then the DPAD is zero. Guaranteed payments paid to the owners are subtracted from income. The taxpayer cannot include them as income when calculating the DPAD, even though it is money earned from the company.<\/p>\n

Another qualification for the DPAD is that it cannot exceed 50% of W-2 wages. If a company only reports guaranteed payments to partners on a K-1, and files no W-2s, then their W-2 wages are zero, and therefore the DPAD is zero as well. The DPAD is also zero for a company that subcontracts everything, or has all the work done by a sole proprietor who does not receive a W-2.<\/p>\n

Let\u2019s give an example of how the DPAD could save money for an entrepreneur. Suppose ABCDEF Construction, LLC is a single-member LLC owned by Abner C. Deffler. It earned a profit of $100,000 and paid W-2 wages to its construction employees of $90,000. The company constructs real property, such as barns, so the activities qualify for the DPAD. Secondly, the company earned a $100,000 profit, so there is income available to take the DPAD. The DPAD should be $9,000, which is 9% of the $100,000 profit. Thirdly, $9,000 is less than 50% of W-2 wages, so the 50% W-2 wage limitation does not reduce the DPAD. Abner will deduct the full $9,000 DPAD based on the activity of ABCDEF Construction, LLC. If Abner\u2019s top federal tax rate is 25%, then that DPAD could save him $2,250 in federal income taxes. If Abner had the same numbers three years in a row, then the DPAD could potentially save him $6,750 over those three years.<\/p>\n

If you own a profitable business that pays W-2 wages in the construction, agriculture, or manufacturing industry, check if your tax return includes the DPAD. If it doesn\u2019t, ask an accountant who is familiar with the DPAD why it is not there. Did your business income fail to qualify, or was it perhaps missed on your tax return? If it was missed, and your company has been profitable in recent years, it is possible that amending previous returns to include the DPAD could save you thousands of dollars. The DPAD gives certain entrepreneurs the opportunity to be good stewards of their money by saving on taxes using a \u201cfree\u201d expense.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

Preface: Optimizing the tax code\u00a0is in\u00a0a few\u00a0instances effortlessly simple. The domestic production activity,\u00a0remaining for the 2017 tax year, is one tax\u00a0attribute that can save some clients thousands + in\u00a0tax dollars.\u00a0The Tax Cuts and Job Act did not continue this “free” tax deduction, but for this years tax filing– here’s how it works.\u00a0 The Free Expense … Continue reading “The Free Expense for Domestic Production Activities”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1],"tags":[],"_links":{"self":[{"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/posts\/267"}],"collection":[{"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/comments?post=267"}],"version-history":[{"count":1,"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/posts\/267\/revisions"}],"predecessor-version":[{"id":268,"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/posts\/267\/revisions\/268"}],"wp:attachment":[{"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/media?parent=267"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/categories?post=267"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.saudercpa.com\/blog\/wp-json\/wp\/v2\/tags?post=267"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}