Exam 3: Corporations: Special Situations

Correct Answer:

Verified

The domestic production activities deduction (DPAD)is designed to provide a tax benefit in a somewhat unique manner.Unlike other deductions,DPAD is not the result of a direct expenditure or other outlay.Instead,it is a deduction based on the net income earned from a specified source.A manufacturing concern,therefore,will determine its DPAD not on the cost of production but on the profit from the sale of the item produced.Thus,DPAD is a deduction based on income!

Correct Answer:

Verified

In the case of a pass-through entity,such as an S corporation or partnership,special rules apply for handling DPADs.Thus,because the deduction is determined at the owner level,each partner or shareholder must make the computation separately.Thus,the entity allocates to each owner his or her share of QPAI.The QPAI allocated is then combined with the domestic production activities the owner may have from other sources (e.g. ,a partner also conducts a manufacturing activity of his or her own).
In working with the wage limitation in a pass-through setting,an allocable portion of W-2 wages of the pass-through entity is passed through to the owner,but only those wages properly allocable to DPGR.The partner or shareholder,however,may add any wages separately paid to the amount allocated from the entity.In the case of a partnership,guaranteed payments are not regarded as W-2 wages.Also,if QPAI (computed taking into account only partnership items allocated to the partner for the tax year)is not greater than zero,a partner cannot use any partnership W-2 wages in calculating the DPAD.
Generally,the DPAD is determined at the owner level in a pass-through entity situation.In some instances,however,the pass-through of the data needed to make this determination can be cumbersome and burdensome.To simplify matters,therefore,the IRS allows eligible partnerships and S corporations to calculate QPAI and W-2 wages for some or all of the owners at the entity level.