Question

Hanna operates her business as a sole proprietorship during 2017. Her domestic production activities deduction (DPAD) before any effect of the wage expense limitation is $70,000. The total W-2 wages that her sole proprietorship pays for the tax year are $110,000. The wages paid to employees not engaged in qualified domestic production activities are $20,000. Hanna's DPAD for 2017 is:

a. $45,000.
b. $55,000.
c. $70,000.
d. $0.
e. None of these choices are correct.

Answer 1

Hanna's Domestic Production Activities Deduction (DPAD) for 2017 is limited to $45,000, due to the wage limitation rule.

Step-by-step explanation:

Hanna operates her business as a sole proprietorship and is determining her Domestic Production Activities Deduction (DPAD) for 2017. The DPAD before any limitation is $70,000, and her total W-2 wages paid for the tax year are $110,000, with $20,000 of that paid to employees not engaged in qualified domestic production activities.

To calculate DPAD, we must consider the wage limitation, which is 50% of the W-2 wages related to the domestic production activities. The wages related to domestic production are $110,000 minus $20,000, which equals $90,000. Fifty percent of $90,000 is $45,000. Since the DPAD cannot exceed the wage limitation, Hanna's DPAD for 2017 is limited to $45,000.