Avoid an IRS audit by knowing what you can–and cannot—deduct this year. The Domestic Production Activities Deduction (DPAD) is likely not a good candidate.
The DPAD was a sweet while it lasted. The deduction was an incentive for manufacturers and businesses to produce goods in the US, as opposed to taking the easy option to go offshore for cheaper labor and sometimes less clunky supply chains.
The deduction was surprisingly broad in its application, offering a tax cut to a wide swath of businesses that produced goods and employed workers including:
- “Oil-related activities” (the filing form had its own column for production activities)
- American-based software development, sound recordings, and “tangible personal property”
- Manufacturing businesses located in the US
- Businesses that leased, licensed, or sold items produced stateside
- Videos and films that were at least 50 percent created in the US
- Engineering and architectural services offered in the US for construction projects built in the US
- US production of utility products like natural gas, electricity, and potable water
It was pretty easy to see the deduction aimed to incentivize products made in the USA, offering a nine percent tax deduction on income earned from such business endeavors.
Though sometimes a bit tricky to calculate, the DPAD was a good thing—while it lasted. The deduction was in place from years 2005 through 2017, when it was repealed by the Tax Cuts and Jobs Act. But the repeal of the deduction does not seem to have stopped some taxpayers from claiming the deduction—or amending returns to claim the return using falsified data. The Internal Revenue Service (IRS) notes, “In the wake of the repeal, the IRS has received a wave of questionable amended returns and claims for tax benefits in the billions of dollars.”
Of course, willfully filing a false tax return will get you in hot water. The IRS is actively auditing those who claim the deduction.
It is important to keep in mind that sections of the Tax Code that call for penalties for those who cannot support the deduction has not been repealed. Says Commissioner Doug O’Donnell, with the Large Business and International Division, “Meritless claims are harmful to tax administration and voluntary compliance. Any corporate taxpayer who is considering filing such a claim should reconsider. Taxpayers who have already filed can withdraw prior to IRS audit contact to avoid penalties."
What comes around goes around. And maybe the DPAD will be reinstated someday. But at the moment, the DPAD remains only a good memory at tax time—not a viable deduction.
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