Are you taking advantage of the "DPAD" Deduction?

Earlier this month, I was connected with a contractor who was using a CPA who didn't have much construction financial/tax background.  In reviewing the tax returns it was clear that the predecessor CPA hadn't taken the Domestic Production Activities Deduction ("DPAD") which many contractors qualify for.  Generally, this deduction is calculated as 9% (for tax year 2010 and later years, it used to be less in previous years) of taxable income and can be significant.  In the simplest terms, the deduction is permitted for taxpayers engaging in a number of activities including the construction of new, or substantially remodeled, real property.  As always, I advise any contractor to consult with their tax advisor regarding their particular circumstances.

The contractor I refer to above will have nearly $500,000 in taxable income for 2010 and engages in the construction of qualifying real property.  The basic, rounded math translates into a tax savings for this contractor of approximately $18,000.  I arrive at this number by taking $500,000 and multiplying it by the 9% rate permitted by Section 199 ("DPAD") and arriving at $45,000.  This $45,000 is a deduction (as opposed to a dollar for dollar credit against the company's tax bill) and as such will result in an approximate 40% savings (effective tax rate).  The $45,000 result multiplied by the 40% effective rate is how I arrived at the $18,000...no small change!

This DPAD deduction had not been taken previously for this particular contractor and most likely would have been missed again for 2010.  Please be sure you are considering this deduction for your business.  If you are a surety professional, banker, attorney or other services provider be sure to make the contractors you are associated with aware as well.