Domestic Production Activities Deduction Increased for Tax Year 2010

For tax year 2010, a business engaged in a qualifying production activity is eligible to take an above-the-line Domestic Production Activities Deduction (DPAD) of 9% (up from 6% in tax year 2009) of the smaller of:

1. The taxpayer's qualified production activities income (QPAI), OR

2. The taxpayer's adjusted gross income calculated WITHOUT the DPAD.

However, your DPAD generally CANNOT be more than 50% of the Form W-2 wages you paid to your employees (including Form W-2 wages allocated to you on a Schedule K-1). Furthermore, the deduction is reduced if you have oil-related qualified production activities income.

The Domestic Production Activities Deduction is limited to income arising from qualified production activities in whole or significant part based in the United States. For tax year 2010, certain domestic production activities in Puerto Rico are excluded.

A business engaged in the following lines of business may qualify for the Domestic Production Activities Deduction. These are the "qualified production activities" eligible for claiming the deduction under Internal Revenue Code Section 199:

•  Manufacturing based in the United States,

• Selling, leasing, or licensing items that have been manufactured in the United States,

• Selling, leasing, or licensing motion pictures that have been produced in the United States,

• Construction services in the United States, including building and renovation of residential and commercial properties,

• Engineering and architectural services relating to a US-based construction project, and

• Software development in the United States, including the development of video games.

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