In May 2006, the IRS issued final regulations under IRC 199, Domestic Production Activities Deduction (DPAD). As a result of comments submitted by CFMA, as well as other industry stakeholders, the final regulations reveal significant changes from prior guidance and liberalize certain important rules.
The basic structure of the DPAD is relatively unchanged from the original deduction introduced in the American Jobs Creation Act of 2004 (Pub. L. No. 108-357). As before, the DPAD can lower a contractor’s tax burden, expanding profits and increasing cash flow.
For those who qualify, the deduction starts at a transition percentage of 3% for 2005 and 2006, increases to 6% for 2007 through 2009, and peaks at 9% in 2010. Eventually, the deduction will reduce the impact of the corporate income tax for qualifying activities by approximately 3%.
This article, the first of a two-part special report, focuses on the final regs and their impact on contractors. It includes a brief overview and a discussion of specific issues that face contractors, developers, and home builders, as well as architects and engineers.