This article is accurate for returns filed through tax year 2017. Under the Tax Cuts and Jobs Act, some of the laws mentioned changed beginning in 2018. Learn more about the updated tax laws enacted under the Tax Cuts and Jobs Act here.
Businesses are like individuals—they have to seek out all available tax deductions and credits before filing an annual tax return. There are plenty of tax-saving measures which have been introduced over the years to benefit businesses in one way or another. So, if you file your business return without looking into these options, you may be leaving a significant amount of money on the table.
In this post, we are going to be discussing one particular deduction which may be beneficial to your business. It is called the domestic production activities deduction, and, as its name suggests, it helps lower the tax liability of companies that keep their production activities right here in the United States.
So, who qualifies for tax breaks like the domestic production activities deduction, and how much can they save? Let’s take a look at the answers to those questions—and others.
What is It?
A good domestic production activities deduction definition is that it incentivizes businesses to keep their manufacturing processes in the United States. By resisting the temptation to go overseas with this work, companies both large and small can enjoy a tax benefit.
Keeping production activities “onshore” is seen as a benefit to the economy as a whole because it provides jobs to American citizens who will work in the factories, warehouses, offices, and other facilities. Therefore, it makes sense for businesses to benefit from a tax perspective.
Because it is often costlier to produce goods domestically compared to using facilities overseas, this tax deduction can help businesses recover some of the money they could have saved by producing goods elsewhere. If you own a business which is engaged in any kind of production activities, the domestic production credit is something which may be used to your benefit.
Check Your Qualifications
Before you can claim this deduction on your business tax return, you need to ensure that your business is engaging in qualified domestic production activities. Simply doing business in the United States without sending any work overseas is not enough to automatically take a deduction based on domestic production. Rather, you’ll need to qualify on the list of categories which meet the criteria for this program—and you’ll need to make sure that none of the exclusions apply to your company.
For starters, construction projects performed in the United States is one of the most common categories for this deduction. Movies made in the United States—where at least half of the film was created on American soil—may qualify for this deduction as well. In addition, those projects which support construction in the United States, including tasks like engineering and architecture, could qualify businesses to take advantage of this program.
To determine for certain if your business will qualify for the domestic production activities deduction, you will have to check in with a tax professional. The accountant(s) who handle your business affairs should be able to offer insight on your eligibility for this tax-saving measure. Once you are sure that your business operations will qualify you for the domestic production credit, you can make decisions based on that knowledge moving forward.
How Much Can You Save?
As is always the case with taxes, the amount that you can save under this provision is going to depend on a number of factors. For the first limitation, you will find that you can only deduct a total of 9% of the income you earn from the business. This is the maximum credit, and you may not even be able to claim this much, depending on a couple of other conditions.
The amount of the deduction cannot go beyond the total taxable income for your corporation, and you are also allowed to deduct only up to 50% of the total wages you have paid to domestic workers.
This is another instance where it’s better to consult with a tax pro. You need to go into these kinds of decisions with all of the information on hand, so you can plan your spending knowing what your tax savings will look like in the end. By crunching the numbers in advance, you will be able to settle on an accurate depiction of how your tax profile will be improved by the use of this credit.
Finding the Right Form
Before you can save any money on your corporate taxes, you will need to find the right form in order to claim this deduction—and the form in question here is Form 8903. Fortunately, this is just a single-page form, and it should be easily completed with information that your business already has on hand. Specifically, you’ll need to know the cost of production as well as the income this production has generated.
At the end of the form, you will be left with a total that will represent your deduction. This deduction could land in one of two places, depending on whether you are filing as an individual or a corporation. For a corporation, the correct place for the deduction is line 25 on Form 1120. As an individual, you will want to look to line 35 on your Form 1040.
An Uncertain Future
One thing to keep in mind when planning for tax purposes—whether as an individual or a corporation—is that tax deductions are not guaranteed to carry on from year to year. The domestic production activities deduction is a relatively new entry in U.S. tax law, going into effect in 2005. And, of course, there is no guarantee that it will remain on the books moving forward. Tax laws change frequently, so monitoring the situation is in the best interest of every business.
For one thing, the deduction may be completely eliminated if it is determined that it is no longer serving its intended purpose. Alternatively, the laws may change who qualifies for the domestic production activities deduction. For example, some of the categories could be eliminated, or the provisions could be changed with regard to those who are excluded. Finally, the amount of the deduction could be reduced to the point where it would no longer offer a meaningful benefit to most businesses.
We’re not suggesting that this tax deduction is going away any time soon. The point is simply this: tax code is constantly changing, and making large business decisions based solely on current tax laws can be risky. The smart business owner will always be following changes—and potential changes—which pertain to his or her organization.
The domestic activities production deduction could save your business a meaningful amount of money at the end of the year, provided you meet the necessary qualifications and limitations. This credit will not be the only factor in determining whether or not your company is going to produce in the United States or offshore, but it is something worth keeping in mind. The combination of reducing your tax burden while offering jobs to citizens is something that many businesses have found beneficial over the 10+ year history of this tax deduction program.