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Federal Taxation

Uniqueness of domestic production activities deduction (DPAD)

Thomas began a business, Gold, Inc., on July 1, 2010. The business extracts and processes silver ore. During 2012, Thomas becomes aware of DPAD and would like to take advantage of this deduction. Identify the relevant tax issues for Gold, Inc.

Further, the DPAD is unlike other tax deductions and is designed to provide a tax benefit in a somewhat unique manner. Based on the readings and examples, how is this deduction so unique? What types of businesses are permitted to use this deduction? Does the deduction fit the needs of those it serves?

Selection of Tax Issues

Milton and Shirley file a joint tax return on which they itemize their deductions and report AGI of $50,000. During the year, they incurred $1,500 of medical expenses when Brenda injured her knee. Furthermore, their dentist informed them that their son, Bryan, needs $5,000 of orthodontic work done to correct his overbite. Milton also needs a new pair of glasses that will cost approximately $500. What tax issues should Milton and Shirley consider? Explain.

Solution Preview

Uniqueness of domestic production activities deduction (DPAD)

The Domestic Production Activities Deduction is on income derived from domestic manufacturing activities, and is meant to encourage more domestic production, which means production within the United States borders. The instruction sheet for the tax form 8903 (which reports the Domestic Production Activities Deduction and Part one of Section 199 which defines the Income Attributable to Domestic Production Activities. If Thomas began his business and wants to take this deduction in 2010 and 2011, he can take 9% of the Net income as a DPAD deduction, since his business is incorporated, and that deduction must be less tha 50% of the W-2 wages that he paid out each year. The IRS directions are: ...

Solution Summary

Two federal income tax situations are discussed, one relating to the domestic production activities deduction, and the other relating to the change in the medical expenses threshold.

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