PORTFOLIO

Section 199: Deduction Relating to Income Attributable to Domestic Production Activities (Portfolio 510)

Tax Management Portfolio, Section 199: Deduction Relating to Income Attributable to Domestic Production Activities, No. 510-2nd, discusses the deduction available to taxpayers that engage in qualifying domestic production activities, including the formula for computing the deduction and the various attributes of that formula.

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DESCRIPTION

Tax Management Portfolio, Section 199: Deduction Relating to Income Attributable to Domestic Production Activities, No. 510-2nd, discusses the deduction available to taxpayers that engage in qualifying domestic production activities, including the formula for computing the deduction and the various attributes of that formula.

This Portfolio includes a detailed discussion of the statutory language and legislative history of §199, including various statutory amendments made after the enactment of §199. In addition, this Portfolio analyzes the voluminous guidance issued by the Internal Revenue Service and Treasury since January 2005, including Notice 2005-14, proposed and temporary regulations, final regulations, and various revenue rulings and procedures. Such guidance provides numerous qualification, definitional, and computational rules that must be satisfied by taxpayers seeking to benefit from a deduction under §199.


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AUTHORS

BETH M. BENKO
Beth M. Benko, B.S.B.A., cum laude, Bowling Green State University (1990); J.D., Marshall-Wythe School of Law of the College of William and Mary in Virginia (1998); member, the Virginia State Bar and the District of Columbia Bar; member, the American Bar Association Section of Taxation; adjunct professor, Georgetown University School of Law; certified public accountant, State of Ohio and District of Columbia.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. Background

A. History of United States Export Incentives

B. Repeal of ETI Regime and Transition Rules

C. Section 199 - Deduction Relating to Income Attributable to Domestic Production Activities

1. Creation of § 199 - AJCA

2. Modifications to, and Guidance for, § 199

a. Notice 2005-14

b. Proposed Regulations

c. Gulf Opportunity Zone Act of 2005

d. TIPRA

e. Final Regulations

f. TIPRA Regulations

g. Tax Relief and Health Care Act of 2006

h. Final Regulations on Qualified Film

i. EESA (H.R. 1424)

(1) Limitation Related to Income Attributable to the Production of Oil and Gas

(2) Extension of Provision Related to Income Attributable to Production Activities in Puerto Rico

(3) Modifications Related to Film and Television Productions

3. Form 8903

III. Section 199

Introductory Material

A. Deduction Formula

1. Taxable Income

a. Net Operating Losses

b. Alternative Minimum Taxable Income ("AMTI")

2. W-2 Wages

a. In General

b. Calculation of W-2 Wages for the Taxable Year

(1) Common Law Determination of "Employee"

(2) Methods Used to Calculate W-2 Wages

(3) Short Taxable Years

c. Determination of W-2 Wages Properly Allocable to DPGR

(1) General Rule: Any Reasonable Method

(2) Safe Harbors

(3) Entity Structure Issues

3. QPAI

a. Formula

b. DPGR

(1) Item-by-Item Determination of DPGR

(2) Definition of "Gross Receipts"

(3) Allocation of Gross Receipts between DPGR and non-DPGR

(4) Multiple-Year Transactions

(5) Specific Exclusions from DPGR

(a) Sale of Food and Beverages Prepared at a Retail Establishment

(i) Definition of Retail Establishment

(ii) Allocation of Gross Receipts

(iii) De minimis Safe Harbor

(b) Transmission or Distribution of Electricity, Natural Gas, or Potable Water

(c) Related Persons

(d) Disposition of Land

c. Qualifying Activities

(1) Lease, Rental, License, Sale, Exchange, or Other Disposition

(a) Taxable Exchanges

(b) Hedging Transactions

(c) Embedded Services

(i) Qualified Warranty

(ii) Qualified Delivery

(iii) Qualified Operating Manual

(iv) Qualified Installation

(v) Qualified Computer Software Maintenance Agreement

(vi) De Minimis Amount

(d) Advertising Income

(i) Tangible Personal Property

(ii) Computer Software

(iii) Qualified Film

(e) Online Computer Software

(2) Construction of Real Property

(a) Definition of Real Property

(b) Activities Constituting Construction

(c) Gross Receipts Derived from Construction

(d) Land Safe Harbor

(e) De Minimis Exception

(3) Architectural and Engineering Services

(a) Engineering Services

(b) Architectural Services

(c) De Minimis Exception

d. Qualifying Property

(1) QPP MPGE by the Taxpayer in Whole or in Significant Part within the United States

(a) Tangible Personal Property

(b) Computer Software

(c) Sound Recordings

(d) MPGE

(i) Packaging, Labeling, and Minor Assembly

(ii) Installation

(iii) Consistency with § 263A

(e) By the Taxpayer

(i) In General

(ii) Exceptions

(f) In Whole or in Significant Part

(i) Substantial in Nature

(ii) 20% Safe Harbor

(iii) Special Rules

(iv) Similarity with § 954

(g) Within the United States

(h) Summary

(2) Qualified Film

(a) In General

(b) Receipts Includible in DPGR

(i) Advertising Revenue

(ii) Tangible Media

(c) Receipts Excluded from DPGR

(d) "Not-Less-Than-50%-of-Total-Compensation" Standard

(i) Actors, Production Personnel, Directors, and Producers

(ii) Compensation for Services

(iii) Determination of 50%

(iv) Produced by the Taxpayer

(v) Safe Harbor

(vi) Application to Partnerships and S Corporations

(3) Electricity, Natural Gas, or Potable Water

(a) Natural Gas

(b) Potable Water

(c) Exclusion for Transmission and Distribution Activities

(d) De Minimis Rules

(e) Hedging Transactions

(f) Normalization

(g) FERC Considerations

e. Costs Allocable to DPGR

(1) CGS Allocable to DPGR

(a) Determining CGS

(i) Multiple-Year Transactions

(ii) Special Rules for Imported Items or Services

(b) Allocating CGS

(i) Rules Applicable to LIFO

(ii) LIFO/FIFO Ratio Method

(iii) Change in Relative Base-Year Cost Method

(c) Qualifying Small Taxpayers

(2) Other Expenses Properly Allocable to DPGR

(a) Section 861 Method

(i) In General

(ii) Charitable Contributions

(iii) Interest

(iv) State Taxes

(v) Research and Experimental Expenses

(vi) Treatment of Items from a Pass-Thru Entity

(b) Simplified Deduction Method

(c) Small Business Simplified Overall Method

(d) Comparison Examples

B. Application to Specific Taxpayers

1. EAGs

a. Computation of the EAG's § 199 Deduction

b. Attribution of Activities

c. Anti-Avoidance Rule

d. Allocation of the EAG's § 199 Deduction

(1) Consolidated Groups

(2) Members of the EAG and Allocation Issues Related to Part-Year Members

(3) Computation of § 199 Deduction for Members of EAG with Different Taxable Years

2. Pass-Thru Entities

3. Patrons of Agricultural and Horticultural Cooperatives

a. In General

b. Operations of Agricultural and Horticultural Cooperatives

c. § 199 Deduction for Cooperatives

4. Individuals

C. Special Rules

1. Certain Non-Recognition Transactions

2. Section 1031 Exchanges

3. Section 381 Transactions

4. Taxpayers with a 52-53 Week Taxable Year

5. Adjustments Pursuant to Section 481(a)


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Selected Text of Administrative Guidance Under § 199, with Introductory Comments

Worksheet 2 IRS Form 8903 - Instructions

Worksheet 3 IRS Form 8903 Completed - Sample

Worksheet 4 Section 199 Conformity Map