The Domestic Production Activities Deduction (DPAD) is an incentive designed to reward companies that manufacture or produce their goods in the U.S. rather than outsourcing overseas. DPAD was first implemented in 2005 and allows qualifying businesses to receive an up to a 9% tax deduction on income earned from qualified production activities.
DPAD is available to all businesses that engage in domestic manufacturing and production activities. Businesses qualifying for the deduction include traditional manufacturers as well as the following:
- Construction firms performing services in the U.S.
- Engineering and architectural firms performing services on domestic construction projects
- Film and video producers (eligible films and videos must be produced at least 50% in the U.S.)
- Firms in the sound recording industry
- Computer software development companies
- Electricity and natural gas producers
- Food and beverage producers
- Potable water producers
Tax Benefits and Compliance
Companies from the above industries that are generating income can receive an up to a 9% tax deduction on income earned from qualified production activities. These companies must also meet the following requirements:
- A business can only qualify if it has employees in the United States
- A business can only deduct half the amount paid to workers engaged in domestic production activities
- If a company is set up as a sole proprietorship, S corporation, partnership or LLC, the deduction is limited to adjusted gross income