Friday, January 28, 2005
Beth M. Benko & Jane A. Rohrs (both with Ernst & Young) have published The § 199 Domestic Production Deduction: An Overview of the Interim Guidance, also available on the Tax Analysts web site as Doc 2005-1666, 2005 TNT 18-48. Here is part of the abstract and conclusion:
Notice 2005-14 provides rules and definitions for taxpayers to use in computing the § 199 deduction. In general, § 199 provides a deduction equal to 3% (increasing to 9% when fully phased in in 2010) of the lesser of: (a) taxable income derived from a qualified production activity or (b) taxable income, for the tax year in question. However, the deduction is limited to 50% of the W-2 wages paid by the taxpayer during the calendar year that ends in that tax year.
Notice 2005-14 is detailed and provides answers to many of the questions that arose as a result of the enactment of § 199. In that respect, Treasury and the IRS were responsive to the need of taxpayers to have definitive answers as quickly as possible following the enactment of § 199. Nevertheless, many issues remain unresolved and much of the guidance relies on taxpayers using a "reasonable method." Presumably, future guidance will provide more clarity and certainty for taxpayers in computing the § 199 production deduction.
The goal of much of the recent guidance issued by Treasury and the IRS has been to create tax simplification and to minimize controversy by providing administrable rules. Notice 2005-14 does include some practical administrable guidance. However, the computation of the § 199 production deduction will require taxpayers to spend valuable time and resources gathering and analyzing information that was not previously required to determine the taxpayer's tax compliance burdens. Moreover, controversy will likely exist as taxpayers and the IRS struggle to reach agreement on what is, for example, "reasonable" in light of the existing facts and circumstances, or decide to test the boundaries of existing tax principles already the subject of dispute, but nevertheless "borrowed" for purposes of § 199.