Domestic Production Activities Deduction

Take advantage of a tax deduction for contractors who do work in the U.S.A.

Could your contracting business qualify for a tax deduction designed to discourage companies from outsourcing work overseas? You bet it can! The Domestic Production Activities Deduction (often referred to as the Qualified Production Activities Deduction) provides tax incentives for small and large businesses to produce most of their goods or do the majority of their work in the United States rather than sending it overseas.

Contractors and construction business owners aren’t aware of this tax deduction because it’s usually associated with oil-related businesses. In fact, Form 8903, which is used to claim the deduction, has two columns. One of them is devoted exclusively to oil-related activities. However, the deduction can apply to virtually any firm that manufactures, grows, extracts, produces, develops or improves goods primarily in the United States. This includes any commercial contracting or construction activity done in the U.S.

The maximum deduction you can claim for domestic production activities is nine percent of the income your business earns. Here’s an example of what this deduction could mean for a typical contracting or construction business:

Annual earnings for the business: Business tax rate: Nine percent deduction on those earnings: Total annual tax savings:
$500,000 35 percent $45,000 $15,750

Does this give you a sense of what taking advantage of the Domestic Production Activities Tax Deduction could mean to your firm? Think about all the ways you could reinvest that money in your business to market it, take on new work, purchase equipment or hire additional workers.

Don’t shortchange yourself

Many online resources encourage business owners to take a simplified three percent deduction from their gross income for domestic production activities. That’s because figuring out the actual deduction involves relatively complex calculations:

  • Qualified production activities income (QPAI)
  • Minus expenses for qualified production activities
  • Equals net income from qualified production activities
  • Times the deduction amount of three percent
  • Equals the Qualified Domestic Production Activities Deduction.

Avoiding doing the math could cost your business a lot of money. An experienced tax professional can work with you to optimize this deduction.


Of course, there are some limitations associated with this deduction:

  1. The maximum credit you can claim under the Domestic Production Activities Tax Deduction is nine percent of the income you earn from your business per year. (Your deduction cannot exceed your corporation’s taxable income.)
  2. Since the purpose of the deduction is to increase production and employment in the U.S., a business only qualifies for it if it employs workers.
  3. You can only deduct up to half the amount you pay people doing work in the United States.

If this seems complicated, it doesn’t have to be. An accounting firm that specializes in working with contracting and construction businesses, and that has experience with the Domestic Production Activities Tax Deduction, can help. Contact us today. Don’t miss out on this opportunity to deduct nine percent of your firm’s annual income from your taxes. You deserve it for doing business in the U.S.A.

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