The Most Overlooked Business Deduction
Way back in 2004 Congress added a new Internal Revenue Code Section that allows a deduction to businesses just for operating a business. There is no requirement to buy anything, there is no requirement to spend anything, and there is no requirement to borrow anything. This deduction is available to sole proprietors, farmers, LLC’s, S corporations and C Corporations, and is available just for “doing what you are doing”. Yes, it is a true made-up deduction, just like non-cash charity deductions, only this one is legal! We call this deduction the Domestic Production Activities Deduction (DPAD), but the IRS calls it the manufacturer’s and producer’s deduction.
The deduction is 9% of the lesser of net income or qualified production income (the deduction is limited to 50% of wages). So nearly any business with qualified production income is able to take an additional 9% deduction just for producing a product. This means that a farmer gets a 9% of net income deduction without spending any more money. It means machine shop clients, builders, developers, manufacturers, print shop operators and many more business owners will get this deduction as well.
The deduction is aimed at companies that produce a tangible product in the United States, and that employ workers to do so. And yes, it is 9% of the profit! The owner that qualifies and makes $100,000 will only pay tax on $91,000 if you remember this deduction.
The deduction is taken on IRS Form 8903, which has been unchanged for many years. It is taken directly on the applicable schedule C or F, or as a flow through item on a K-1 for partnerships, LLCs and S corporations.
The deduction is available to taxpayers whose activities are the manufacture, production or growth of items they sell, which include:
• The sale of tangible personal property
• The sale of computer software (but not online services)
• The sale of recordings, books, tapes, CD’s and DVD’s
• Business interruption proceeds and payments not to produce
• Farming, raising animals and fishing
• Printing (including advertising sales in printed publications)
• Most new construction and renovation.
Activities that do not qualify for the deduction include most service businesses and most grocery stores and restaurants unless the restaurant packages and sells products that it produced itself.
If you own a business, give us a call to make sure you are not missing out on this important deduction.
An upcoming event that would qualify for a personal charitable deduction would be attending the STEMM Charity Gala presented by the Dayton Defense Education Foundation. The Gala takes place on 9/23/17, more information and event registration can be found by clicking on the link below:
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.