Although it’s been around since 2004, the Domestic Production Activities Deduction (DPAD) still causes occasional confusion among construction businesses.

Under Section 199 of the Internal Revenue Code, businesses can offset tax due on a portion of the income they generate from domestic production activities. This includes qualifying construction-related income.

To qualify for the DPAD, construction-related income must be generated by either the construction or substantial renovation of real property. The term “real property” includes buildings, structural components of buildings and other inherently permanent structures such as roads, bridges, and oil and gas wells. Some engineering, architectural and other services related to qualifying projects may also be eligible for the DPAD.

Broadly speaking, most new construction projects in the U.S. would qualify for the DPAD, although there could be exceptions for some companies. On renovation projects, the answer is not always so clear-cut.

The critical question is whether the work amounts to a substantial renovation. If it does, it’s typically eligible for the DPAD. But if it’s classified as repair or maintenance work, it does not qualify.

A 2011 tax case helped clear up the DPAD a bit. The term “substantial renovation” is now construed as an activity that does at least one of three things: it materially increases the value of the property, substantially prolongs its useful life, or adapts the property to a new or different use.

The DPAD is equal to 9 percent of the qualified income, or 50 percent of the W-2 wages that were paid in conjunction with the construction activity, whichever is less. The IRS considers Section 199 to be an issue of “high strategic importance,” so be sure you have clear documentation to support your deduction.