TREASURY AND IRS ISSUE REGULATIONS ON DOMESTIC PRODUCTION ACTIVITIES DEDUCTION

This Department of Treasury press release may be viewed at:
http://www.treas.gov/press/releases/js4286.htm

   WASHINGTON, DC – The U.S. Treasury Department and Internal Revenue
   Service (IRS) today issued final regulations under Code section 199 on
   the deduction relating to domestic production activities.  In
   addition, the Treasury Department and IRS simultaneously issued
   proposed and temporary regulations regarding the application of
   section 199 to certain transactions involving computer software, as
   well as a Revenue Procedure that provides methods for calculating W-2
   wages for purposes of section 199. 

   The section 199 deduction relating to domestic production activities
   was enacted in October 2004 as part of the American Jobs Creation Act,
   and was recently modified by the Tax Increase Prevention and
   Reconciliation Act of 2005.  The deduction generally equals three
   percent of income from domestic production activities for 2005 and, by
   2010, nine percent of such income. The activities eligible for the
   deduction include not only the manufacture of personal property such
   as clothing, goods, and food, but also the development of computer
   software, film and music production, the production of electricity,
   natural gas, or water, and construction, engineering, and
   architectural services.

   The final regulations include many of the rules contained in proposed
   regulations issued in October 2005, and the initial guidance, Notice
   2005-14, issued in January 2005.  In addition, in response to more
   than eighty comment letters received regarding the proposed
   regulations, the final regulations provide many additional
   comprehensive rules, definitions, simplifying conventions, and
   examples to ease the administrative burden on taxpayers.

   The final regulations are generally effective for taxable years
   beginning on or after the date the final regulations are published in
   the Federal Register.  For taxable years beginning prior to the
   effective date of the final regulations, a taxpayer generally may
   apply either (i) the final regulations, provided the taxpayer applies
   all provisions in the final regulations; or (ii) subject to certain
   limitations, the rules provided in the Notice as well as the proposed
   regulations.

   The final regulations do not address the changes to section 199 made
   by the Tax Increase Prevention and Reconciliation Act of 2005.  The
   Treasury Department and IRS intend on issuing regulations to address
   these changes, which are effective only for taxable years beginning
   after May 17, 2006. 

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Related Documents:
  Final regulations under section 199
    http://www.treas.gov/press/releases/reports/td9263.pdf
  Proposed and temporary regulations under section 199
    http://www.treas.gov/press/releases/reports/11157806.pdf
  Revenue Procedure 2006-22
    http://www.treas.gov/press/releases/reports/rev proc  200622.pdf