Originally intended as a tax break for US based manufacturers to make them more competitive in the worldwide economy, the IRC Section 199 Domestic Production Activities Deduction, or "DPAD" for short, has been helping developers and construction contractors effectively lower their taxes and increase their cash flow in a depressed real estate market and overall slow economy.
 
Effective for tax years beginning after December 31, 2004, this deduction, when fully phased in, can provide as much as an effective 3% reduction in the federal income tax rate of eligible taxpayers with qualifying domestic production activities.  For tax years 2007 - 2009 the potential tax rate reduction for eligible activities is up to 2% and 3% for tax years thereafter. This can be significant tax savings. Qualifying activities for a developer or construction contractor are based on U.S. construction/development of residential or commercial buildings, permanent land improvements, infrastructure and the like.
 
One major hurdle in qualifying for the DPAD is the need to have sufficient labor costs of the qualifying projects to be paid as W-2 wages by the entity eligible for the DPAD benefit.  This means that the developers or contractors operating using solely independent contractors or as sole proprietors or partnerships with no employees may not qualify for the deduction or need to do some planning to qualify.
 
As the rules for the Section 199 are somewhat complex, early planning is key to successfully taking advantage of this deduction.  For more information on how your organization can profit from this deduction, feel free to contact us.