In 2004, producers of goods in the U.S. were awarded a tax incentive called the domestic production activities deduction (DPAD). It seems hard to believe that was 13 years ago, but this incentive was repealed in the recent tax reform legislation.
DPAD provided an income tax deduction equal to 9% of the lesser of taxable income or qualified production activities income. This was a nice deduction for U.S. producers such as manufacturers, contractors, architects and engineers. The incentive was primarily instituted to encourage domestic manufacturing and production.
Certainly encouraging U.S. manufacturing and production is just as important in 2018, right? So why would this deduction be repealed?
The intention was to replace it with the bigger and broader Qualified Business Income Deduction (QBID), which was signed into law as part of the Tax Cuts and Jobs Act. Beginning in 2018, owners of pass-through entities are now eligible for a 20% deduction on “qualified business income.”
The process of calculating qualified business income is complicated, and there are still many questions about how it will work. Additionally, not all businesses qualify for the QBID deduction. Manufacturers, contractors, architects and engineers are included (as they were with DPAD) as well as certain other businesses. But service-oriented entities, such as healthcare, law, accounting and consulting, are generally excluded. So the deduction is still focused on production type activities.
As always, your CPA firm is a good resource if you have questions about this change. With professional guidance, you’ll have a better chance to enjoy your last year of DPAD and get ready for QBID.
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