The IRS issued final regulations under the Tax Increase Prevention
and Reconciliation Act of 2005 (TIPRA) amending provisions of the
domestic production activities deduction of IRC § 199. The deduction
for tax years beginning in 2008 is potentially 6% of the lesser of
qualified production activities income (QPAI) or taxable income
without regard to section 199 (adjusted gross income for an
individual). The deduction is further limited to half of W-2 wages
paid during the calendar year that ends in the tax year. The new
regulations specify W-2 wages as those allocable to domestic
production gross receipts (DPGR). It also provides safe harbors for
determining the allocation under either a “wage expense method” or
“small business simplified overall method.” Further, the regulations
provide that in the case of a partnership or S corporation, such wages
must be allocated among the partners or shareholders.
The final regulations also clarify that each member of an
expanded affiliated group—or EAG, defined in IRC § 7874(c)(1)—must
separately perform its own allocation of W-2 wages to DPGR before they
are aggregated by the EAG. In addition, the regulations provide that
to the extent a net operating loss (NOL) is used in the year it was
sustained to determine a taxable income limitation under section 199,
such NOL is not treated as an NOL carryover or carryback in
determining the taxable income limitation in subsequent or previous years.
The regulations, issued as Treasury Decision 9381, took effect Feb. 15, 2008.
