DPAD Regulations Revisited: What Contractors Need to Know

As part of the American Jobs Creation Act of 2004, Congress passed the Domestic Production Activities Deduction (DPAD) permitting specific industries, including contractors, architects, and engineers, to deduct up to 9% of the net income of their operations. The deduction acts in part as an incentive for domestic production and to increase domestic jobs.

This article is an updated and abbreviated version of a twopart series first published in 2006 on DPAD1 in an effort to bring attention to the potential importance and impact for contractors.


Businesses may claim a DPAD that is equal to a percentage of the income earned from specific production activities undertaken in the U.S., including manufacturing; food production; software development; film and music production; production of electricity, natural gas, or water; and construction, engineering, and architectural services.

The DPAD equals the lesser of:

  1. 9% of the smaller of:
    1. The qualified production activities income (QPAI) of the taxpayer for the tax year; or
    2. Taxable income for the tax year.
  2. 50% of the W-2 wages of the employer for the tax year.

Turn to the next page for the fundamentals of calculating DPAD.

General Requirements

In order to deduct a DPAD for construction work, a contractor must meet three general requirements:

  1. Be engaged in the active conduct of a trade or business treated as a construction activity;
  2. Perform construction work involving real property in the U.S.; and
  3. Derive domestic production gross receipts (DPGR) from the construction activity.

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