With basketball season just around the corner, you may remember the “make it, take it” playground version of basketball, where you keep the ball if you score. We can also apply this approach to companies that ‘make’ products, since they can likely ‘take’ added tax savings from a special deduction. While this non-cash deduction isn’t new (it started in 2004), it’s good-sized – up to 9 percent for qualifying activities – and one that many businesses overlook.
The federal “domestic production activities deduction” applies to both C corporations and “flow-through” entities, like S corporations and partnerships. Wisconsin’s version of the DPAD, however, is a tax credit that covers only manufacturing and agriculture activities performed in the state.
The DPAD is designed to encourage domestic manufacturing. As such, it covers the most common categories, including manufacturing, construction, agriculture, filmmaking, oil & gas extraction and software.
However, the deduction was also written to cover some other service providers. While the rules vary slightly, there are plenty of opportunities to receive DPAD tax benefits, including:
- Architects & engineers – Work performed in the U.S. for projects designed in the U.S.
- Advertisers – If done as part of the sale of magazines, newspapers, phone directories, etc., the advertising revenue can qualify.
- Bakers, butchers, etc. – Food preparation at a restaurant or retail operation doesn’t qualify, but it can if the food production occurs outside the retail facility or if the business sells the food wholesale.
- Coffee roasters – Coffee bean roasters can qualify in select situations.
- Florists – Growing plants can qualify, along with floral arranging.
- Jewelers – Purchasing jewelry and then polishing it, cutting it, shaping it, etc.
What does the tax benefit look like? If a floral business makes a profit of $200,000 in a year, it could receive up to an $18,000 deduction – more than $6,000 in tax savings – and does not need to spend anything to receive the deduction.
In short, if your business makes a product then you may qualify for some federal tax savings this year. It’s time to call your tax adviser to see if you have what it takes to score a slam dunk.
Jim Brandenburg is a partner in Sikich LLP’s tax practice in Brookfield.
