Previous installments of Aronson’s Tax Compliance Series for Construction Contractors focused on methods of accounting, the lookback provision, and long-term contract adjustments. Today, we switch our focus to a fantastic opportunity to not only comply with IRS regulations, but benefit from a big tax deduction.
The Domestic Production Activities Deduction, created by the American Jobs Creation Act of 2004, is a gem! The deduction is equal to 9% of qualified production activities income (QPAI), limited to 50% of qualified W-2 wages paid for the year.
Qualified activities under this deduction include:
- Residential and commercial construction
- Infrastructure improvements
- Land preparation activities
- Architectural and engineering services
To calculate the deduction allowed, 9% is applied to the lesser of QPAI or taxable income for the tax year after the utilization of any Net Operating Loss (NOL) carryforwards. There are strict rules as to what is considered QPAI versus non-eligible activities; however, the IRS has permitted a de minimus calculation that can be beneficial to many contractors allowing 100% of their activities to qualify for the deduction. Not a C Corporation? Don’t worry. The deduction flows through to the stockholders and members of pass-through entities as well.
There are many situations where eligible contractors have not taken advantage of this very valuable deduction. Be sure you have!
For more information on these common tax reporting issues, or to discuss how they may impact your construction business, please reach out to Chavon Wilcox, CPA, CCIFP, partner in Aronson LLC’s Construction and Real Estate Group at 301.231.6288.