DPAD: A perk of U.S. domestic manufacturing, but make sure you qualifyDPAD: A perk of U.S. domestic manufacturing, but make sure you qualify

The not-so-good news, says Jeff Mengel, a consultant at accountancy and business consultant Plante & Moran LLC , and a person very familiar with the plastics industry, is that these deductions can be quite complex. As he commented in his company's recent Perspectives publication, "Many manufacturers think, 'I have taxable income of $5 million; therefore, my deduction is 9% of $5 million," writes Mengel. "It's not that simple. Instead, you have to calculate the qualified production activities' income and expenses for each business activity. Those are separated into qualifying and non-qualifying activities, and the 9% deduction is taken against the qualifying activities."

Any corporation, partnership, individual, or other business entity may claim the Domestic Production Activities Deduction if it conducted eligible qualified production activities.

According to an IRS web site, the rules that apply to molders and mold makers are fairly straightforward for the DPAD. Qualifying activities can include:

1.     Have manufacturing based in the U.S. that is selling, leasing, or licensing items that have been manufactured in the U.S.

2.     Construction of real property in the U.S., including building and renovation of commercial or residential properties

3.     Engineering and architectural services performed relating to a U.S.-based construction project

4.     Software development in the U.S.

Recently Plante & Moran helped a client in the recycling business take advantage of the DPAD. Typically you have to be manufacturing something, Mengel notes. "This particular client was producing a new plastic product from its recycled materials," he says. "After close study, the Plante & Moran team found that the company qualified to receive a DPAD of more than $1,500,000, reducing its tax liability by more than $500,000. And the systematic review and analysis we provided will minimize its audit risk."

A sample formula: Qualified Production Activities Income (QPAI) minus Qualified Production Activities Expenses (QPAE) = Qualified Production Activities Net Income x the Qualified Production Activities deduction amount of 9% - the Tentative QPA Deduction.

Because this deduction can be complex and is a tier one-audit risk, you probably want to enlist the help of a good CPA to plan and document the deduction. You definitely want to look into it if you think you qualify.