An Explanation of Changes in the Final Regulations of Section 199: The Domestic Production Activities Deduction

摘要

On May 24, 2006, the U.S. Treasury Department and Internal Revenue Service issued final regulations under IRC Section 199 which allows a deduction relating to income attributable to certain domestic manufacturing activities. In addition, the Treasury and the IRS simultaneously issued temporary regulations that also serve as proposed regulations regarding the application of Section 199 to certain transactions involving computer software, as well as Revenue Procedure 2006-22 that provides methods for calculating W-2 wages for Section 199. The final regulations include most of the rules contained in the proposed regulations issued in October 2005 and in the initial interim guidance under Section 199 in Notice 2005-14. However, the final regulations, in response to more than 80 comment letters, provide additional comprehensive rules and add clarification through definitions, examples, and simplifying conventions. The final regulations do not address the changes to Section 199 made by the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). The Treasury and IRS intend to issue regulations in the future to address these changes, which are effective only for taxable years beginning after May 17, 2006. The purpose of this article is to review the primary provisions of Section 199 and to discuss and clarify the key changes to the proposed regulations as a result of the issuance of the final regulations.