The Domestic Production Activity Deduction (DPAD) was enacted in 2004 to help both big and small American businesses with domestic facilities export their goods internationally.
DPAD Basics
The deduction was available for contractors, manufacturers, farmers, and other product-producing companies across a wide range of industries. However, as part of the Tax Cuts and Jobs Act (TCJA) of 2017, the DPAD tax law has recently been repealed.
The DPAD allowed manufacturers and other American producers to receive a tax deduction equal to 9% of their qualified production activities income (QPAI), which represents the domestic production gross receipts (DPGR) minus line items such as expenses, cost of goods, deductions, and losses. For some companies, the repeal of this law has brought about a financial void, leaving many manufacturers, contractors, and producers anxious.
However, the Joint Committee on Taxation estimates that this repeal will ultimately result in a $174 billion increase in revenue by 2026. Additionally, proponents of the repeal believe that it will reduce market distortion, as well as significant tax-planning costs, while simplifying the rules of what constitutes a QPAI.
Furthermore, the DPAD did not apply to all domestic production activities, which forced some companies to invest in certain activities that were less cost-effective than other activities not covered by the deductions.
One of the main criticisms against the DPAD was that it was overly complex, cost-prohibitive, and ultimately ineffective. According to a report compiled by corporate tax policy expert Richard Phillips, the DPAD mainly benefits massive public-owned companies with more than $1 billion in assets, and hardly helps the bulk of manufacturers and contractors.
These large companies, according to the report, represent a whopping 75% of the DPAD’s beneficiaries. The report also points out that, out of the top 25 companies that benefited from DPAD, only a handful were actual manufacturing companies. The vast majority of these top 25 companies, which were dominated by tech and entertainment companies like Apple, Disney, Viacom, and Microsoft, all claimed hundreds to thousands of millions of dollars’ worth of tax breaks through the DPAD.
DPAD Repeal: The Silver Linings Tax Playbook
Although this tax repeal does present challenges to some companies, the situation is not entirely doom and gloom. There are other tax law provisions that companies can take advantage of to help offset any negative impacts of the DPAD repeal. For example:
- Corporate tax rates have been reduced to a flat 21%.
- The new qualified business income (QBI) deduction, which allows companies a deduction of up to 20% for pass-through entities, is designed to assist non-corporate manufacturers.
- In order to simplify accounting rules, the TCJA has provisioned that some companies — including those with inventories — are now eligible to utilize the cash method of accounting.
- The TCJA has also expanded the number of deductions for capital expenditures, including an expensing deduction under Section 179, which increases the deduction limit to $1 million on certain purchases. For purchases exceeding $2.5 million, the new Section 179 deductions will provide a phase-out for the beginning portion of the purchase.
- Another capital expenditure deduction is a temporary 100% bonus depreciation deduction for new and used properties that are placed in service between September 27, 2017, and 2023.
- For cars, trucks, and other vehicles used for company driving, new enhanced tax benefits are available.
In addition to new provisions, a few tax credits have survived the cut, including research and development credits and IC-DISCs, so manufacturers and contractors can still take advantage of these.
The Tax Take Away After DPAD
Now that DPAD has been repealed, many manufacturing companies are concerned about what tax season has in store for them. However, while tax laws and repeals always shake up the financial landscape, the TCJA reforms were created with the intention of bolstering the manufacturing community, and provide numerous ways to mitigate the negative impacts of the DPAD repeal. With careful planning and accounting, companies can still stay ahead of the curve.
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