An Overview of the Domestic Production Activities Deduction

The DPAD is available for previous tax years and for some businesses

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Certain companies were able to take a deduction for U.S.-based business activities from 2005 through 2017. That could add up to a nice tax break for certain small businesses. Unfortunately for those who enjoyed the domestic production activities deduction, it was largely eliminated by 2017's Tax Cuts and Jobs Act (TCJA).

The Effect of the 2018 Tax Law 

This deduction was originally part of the American Jobs Creation Act of 2004. It was covered under Internal Revenue Code Section 199 and Internal Revenue Service (IRS) Proposed Regulations 1.199. Then, in 2017, Congress began negotiating and finalizing new tax legislation. The result was the TCJA, which made sweeping changes to U.S. tax law.

Rules were changed, and a handful of tax breaks were added, but many were repealed as well. The domestic production activities deduction (DPAD) was one of those to be eliminated. It expired on December 31, 2017, as the TCJA became effective on January 1, 2018.


Businesses can still claim the DPAD on their 2017 returns and for earlier years, but they must file amended returns to do so. You can generally amend returns up to three years after they were initially filed, so 2017 returns (filed in 2018) may be eligible for amending in 2021.

The DPAD might not be gone forever. Other tax breaks eliminated by the TCJA have been revived by subsequent legislation, so the DPAD could be revived similarly.

The Basics of the Section 199 Deduction

From 2004 through 2017, businesses with "qualified production activities" could take a tax deduction of 9% from the annual income they earned through those activities. The deduction was simple in theory, but the more complicated the business, the more complicated the math becomes for calculating what was a qualified production activity.

In a nutshell, businesses that engaged in manufacturing and other qualified production activities had to implement cost accounting mechanisms to make sure their tax deductions were accurately calculated.

What Are Qualified Production Activities?

A company engaged in the following lines of business could qualify for the domestic production activities deduction. "Qualified production activities" eligible for claiming the deduction under Internal Revenue Code Section 199 include, but aren't expressly limited to:

  • Manufacturing based in the U.S. 
  • Selling, leasing, or licensing items that have been manufactured in the U.S.
  • The production of potable water, natural gas, and electricity in the U.S.
  • Film and movies that were produced at least 50% in the U.S. 
  • Construction services in the U.S., including building and renovation of residential and commercial properties
  • Engineering and architectural services relating to a U.S.-based construction project
  • Software development and sound recordings made in the U.S.

General Rule and Safe Harbor

The DPAD is limited to income resulting from qualified production activities in whole or significant part based in the U.S. Businesses must use either the safe harbor rule or allocate costs using the facts and circumstances of their business if any part of manufacturing or production activities takes place outside the U.S.

The safe harbor rule applies if at least 20% of total costs are from U.S.-based production activities.

Non-Qualified Production Activities

The following lines of business are specifically excluded from claiming the domestic production activities deduction:

  • Advertising and product placement
  • Leasing or licensing items to a related party
  • Selling food or beverages prepared at a retail establishment

Figuring the Tax Deduction

Calculating the DPAD can be either ridiculously simple or enormously complex, depending on the nature of the business. The key is "qualified production activities income" (QPAI) and its limitations. 

The equation works out like this:

  1. Qualified production activities income (QPAI) minus qualified production activities expenses
  2. Equals qualified production activities net income
  3. Times the QPA deduction amount of 9%
  4. Equals the tentative QPA deduction


Qualified production activity income will be the same as gross income for businesses that engage in only one line of business, but businesses with multiple lines of businesses must allocate their incomes.


The dollar amount of the domestic production activities deduction is limited. The deduction can't exceed adjusted gross income for sole proprietors, partnerships, S-corporations, or limited liability corporations. It can't exceed taxable income for C-corporations, nor can the deduction exceed 50% of W-2 wages paid out to employees by any company. Oil companies had to reduce their deduction by an additional 3%.

An Exception for Some Agricultural Businesses

The expiration of the DPAD wasn't entirely sweeping. According to the IRS, specified horticultural cooperatives may still make deductions covered by section 199 for income attributable to domestic production after 2017. If you think your business might still be eligible to claim this deduction, it's best to consult a tax professional.


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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Congress. "American Jobs Creation Act of 2004," Page 1424. Accessed Dec. 9, 2020.

  2. Internal Revenue Service. "File Form 1040-X to Amend a Tax Return." Accessed Dec. 9, 2020.

  3. TurboTax. "What Is Form 8903: Domestic Production Activities Deduction." Accessed Dec. 9, 2020.

  4. Legal Information Institute. "26 CFR § 1.199-3 - Domestic Production Gross Receipts." Accessed Dec. 9, 2020.

  5. Internal Revenue Service. "Instructions for Form 8903 Domestic Production Activities Deduction," Page 4. Accessed Dec. 9, 2020.

  6. Internal Revenue Service. "Instructions for Form 8903 Domestic Production Activities Deduction," Page 1. Accessed Dec. 9, 2020.

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