Lee, Inc., an S corporation, has taxable income of $15 million in 2011. Assume there are two shareholders, each in the top individual tax bracket. What is the maximum total DPAD tax savings for the S corporation shareholders?

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Quizplus · Accepted Answer

The DPAD tax deduction provides for a 9% deduction for eligible domestic production activities. The maximum DPAD deduction is limited to 50% of the W-2 wages paid by the S corporation to its employees. Assuming Lee, Inc. has W-2 wages of at least $6,600,000 (50% of $15,000,000), each shareholder can potentially take a DPAD deduction of $297,000 (9% of $15,000,000) on their individual tax returns. Therefore, the maximum total DPAD tax savings for both shareholders is $594,000 ($297,000 x 2). However, since the shareholders are in the top individual tax bracket, the effective DPAD tax rate is only 5.4% due to the phase-out of itemized deductions and personal exemptions. Therefore, the maximum total DPAD tax savings for both shareholders is $472,500 ($594,000 x 0.8).

Lee, Inc, an S Corporation, Has Taxable Income of $15 Million