What Do Manufacturers and Engineers Have In Common?

Many years ago, the Domestic Production Activities Deduction, or DPAD, was enacted to give domestic producers a tax incentive to keep their production facilities, and jobs, in the United States. Targeting manufacturers, construction contractors, and farmers, the DPAD offers an additional 9% tax deduction from income generated by production activities.

So what does this deduction have to do with an engineering firm? For many engineers, absolutely nothing! However, if your firm performs construction related services some of your activities actually qualify for the deduction. “Construction” means activities and services relating to the construction or erection of real property – any type of building or permanent structure.  Design services, consultation, investigation and supervision related to the project would all qualify. Here is how it works:

The 9% additional deduction is applied to the “Engineering Production Net Income” and results in a $17,100 reduction in income ($190,000 x 9%) in this example. So what does this mean in actual tax dollars? It depends on your effective tax rate, but with the highest rate climbing to 39.6% beginning this year, the firm in this example would have the ability to claim nearly $6,800 in tax savings by taking advantage of this tax rule.

And because this deduction has been in place for many years, it is possible that you may be able to recover taxes paid in prior years simply by amending your tax returns to claim this deduction! Recoveries are generally limited to returns filed within the last three years.

If you have any questions about how this deduction works or if you would like an estimate of how this deduction might benefit you, contact your trusted tax advisor today.