Can You Take a Domestic Production Deduction With a Loss?

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The Domestic Production Activities Deduction (DPAD) is a tax deduction for companies that produce goods locally in the United States. The deduction is up to 9 percent of income during the production process of domestic goods. A company may be eligible for the DPAD even with a net loss for the year.

Domestic Production Deduction

The Domestic Production Deduction is a 9 percent tax deduction for expenses and operating costs in the United States. The DPAD is based on the lesser of net income or qualified production activities income (QPAI) for the previous year. A net loss means no net income for the year. The IRS does allow companies to rollover the net loss to the previous two years or over the next 20 years. Rolling over the net loss may allow companies to use the DPAD for a year in which a net loss occurs.

IRS DPAD Regulations

The Internal Revenue Service (IRS) states that companies must produce goods within the United States and pay employees a Form W-2 wage to qualify for the DPAD. A company that cannot reach a profit even with a debt rollover will not be eligible for the DPAD during the current tax year.

Eligibility

Only companies that produce goods domestically are eligible for the DPAD. The company may be a partnership, S-Corporation, multinational company or cooperative. Partners in an S-corporation with at least a 20-percent in a film-production company may use the DPAD. Certain trusts and estates are eligible if they provide a W-2 wage to caretakers. Agricultural cooperatives are eligible provided the savings are distributed to their members.

QPAI

QPAI is one option for determining DPAD. QPAI is defined as the excess of either domestic production gross receipts or the cost of goods produced and sold plus expenses, losses and deductions. As losses can be applied to QPAI, this number may be high enough to qualify a company even during a year with a net loss in income.

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About the Author

Shannon Webster is a professional writer based in Hagerstown, Md. She has worked with the U.S. Air Force and several state governments since beginning her career in 2001. Webster currently serves as a writer with Decoded Science, specializing in cognitive and social sciences.

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