When we are fortunate to obtain a new construction industry client, the tax deduction which we find has been missed most often by their prior tax preparer is the Domestic Production Activities Deduction (DPAD). The DPAD began in 2005, as a deduction equal to 3% of qualifying income. It increased to 6% for years 2007 through 2009, and will increase to 9% in 2010.
Qualifying income is essentially that portion of taxable income earned in the US attributable to certain manufacturing and domestic production activities. The good news for those involved in construction as a general contractor, builder or trade (for example, a mechanical contractor, electrician, mason, etc.), is that construction of new buildings and structures, as well as substantial renovation of existing structures and facilities, are qualified activities for purposes of the DPAD.
The form of tax entity we work with most often are S corporations. As it relates to S corporations, each owner is allocated his or her portion of qualified production activities income and W-2 wages (note that the DPAD is limited to 50% of W-2 wages paid by the company). Each individual owner then calculates his or her DPAD on their Form 1040.
Admittedly, the past several years have not been good ones for those involved in the construction industry. However, we still see our share of companies who have achieved significant profits during this period. In the last month alone, we have amended returns for two new construction industry clients, owners of S corporations, whose collective refund for years 2006 thru 2008 is in the $5,000-$10,000 range.
If you are an owner of a profitable construction company, you should check to make sure the DPAD has been taken on your Form 1040.