§1.199-1   Income attributable to domestic production activities.

(a) In general.

(b) Taxable income and adjusted gross income.

(1) In general.

(2) Examples.

(c) Qualified production activities income.

(d) Allocation of gross receipts.

(1) In general.

(2) Reasonable method of allocation.

(3) De minimis rules.

(i) DPGR.

(ii) Non-DPGR.

(4) Example.

(e) Certain multiple-year transactions.

(1) Use of historical data.

(2) Percentage of completion method.

(3) Examples.

§1.199-2   Wage limitation.

(a) Rules of application.

(1) In general.

(2) Wages paid by entity other than common law employer.

(3) Requirement that wages must be reported on return filed with the Social Security Administration.

(i) In general.

(ii) Corrected return filed to correct a return that was filed within 60 days of the due date.

(iii) Corrected return filed to correct a return that was filed later than 60 days after the due date.

(4) Joint return.

(b) Application in the case of a taxpayer with a short taxable year.

(c) Acquisitions, dispositions, and short taxable years.

(1) Allocation of wages between more than one taxpayer.

(2) Short taxable years.

(3) Operating rules.

(i) Acquisition or disposition.

(ii) Trade or business.

(d) Non-duplication rule.

(e) Definition of W-2 wages.

(1) In general.

(2) Limitation on W-2 wages for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005.

(i) In general.

(ii) Wage expense safe harbor.

(A) In general.

(B) Wage expense included in cost of goods sold.

(iii) Small business simplified overall method safe harbor.

(iv) Examples.

(3) Methods for calculating W-2 wages.

§1.199-3   Domestic production gross receipts.

(a) In general.

(b) Related persons.

(1) In general.

(2) Exceptions.

(c) Definition of gross receipts.

(d) Determining domestic production gross receipts.

(1) In general.

(2) Special rules.

(3) Exception.

(4) Examples.

(e) Definition of manufactured, produced, grown, or extracted.

(1) In general.

(2) Packaging, repackaging, labeling, or minor assembly.

(3) Installing.

(4) Consistency with section 263A.

(5) Examples.

(f) Definition of by the taxpayer.

(1) In general.

(2) Special rule for certain government contracts.

(3) Subcontractor.

(4) Examples.

(g) Definition of in whole or in significant part.

(1) In general.

(2) Substantial in nature.

(3) Safe harbor.

(i) In general.

(ii) Unadjusted depreciable basis.

(iii) Computer software and sound recordings.

(4) Special rules.

(i) Contract with unrelated persons.

(ii) Aggregation.

(5) Examples.

(h) Definition of United States.

(i) Derived from the lease, rental, license, sale, exchange, or other disposition.

(1) In general.

(i) Definition.

(ii) Lease income.

(iii) Income substitutes.

(iv) Exchange of property.

(A) Taxable exchanges.

(B) Safe harbor.

(C) Eligible property.

(2) Examples.

(3) Hedging transactions.

(i) In general.

(ii) Currency fluctuations.

(iii) Effect of identification and nonidentification.

(iv) Other rules.

(4) Allocation of gross receipts.

(i) Embedded services and non-qualified property.

(A) In general.

(B) Exceptions.

(ii) Non-DPGR.

(iii) Examples.

(5) Advertising income.

(i) In general.

(ii) Exceptions.

(A) Tangible personal property.

(B) Computer software.

(C) Qualified film.

(iii) Examples.

(6) Computer software.

(i) In general.

(ii) Gross receipts derived from services.

(iii) Exceptions.

(iv) Definitions and special rules.

(A) Substantially identical software.

(B) Safe harbor for computer software games.

(C) Regular and ongoing basis.

(D) Attribution.

(E) Qualified computer software maintenance agreements.

(F) Advertising income and product-placement income.

(v) Examples.

(7) Qualifying in-kind partnership for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005.

(i) In general.

(ii) Definition of qualifying in-kind partnership.

(iii) Other rules.

(iv) Example.

(8) Partnerships owned by members of a single expanded affiliated group for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005.

(i) In general.

(ii) Attribution of activities.

(A) In general.

(B) Attribution between EAG partnerships.

(C) Exceptions to attribution.

(iii) Other rules.

(iv) Examples.

(9) Non-operating mineral interests.

(j) Definition of qualifying production property.

(1) In general.

(2) Tangible personal property.

(i) In general.

(ii) Local law.

(iii) Intangible property.

(3) Computer software.

(i) In general.

(ii) Incidental and ancillary rights.

(iii) Exceptions.

(4) Sound recordings.

(i) In general.

(ii) Exception.

(5) Tangible personal property with computer software or sound recordings.

(i) Computer software and sound recordings.

(ii) Tangible personal property.

(k) Definition of qualified film.

(1) In general.

(2) Tangible personal property with a film.

(i) Film not produced by a taxpayer.

(ii) Film produced by a taxpayer.

(A) Qualified film.

(B) Nonqualified film.

(3) Derived from a qualified film.

(i) In general.

(ii) Exceptions.

(4) Compensation for services.

(5) Determination of 50 percent.

(6) Produced by the taxpayer.

(7) Qualified film produced by the taxpayer—safe harbor.

(i) Safe harbor.

(ii) Determination of 50 percent.

(8) Production pursuant to a contract.

(9) Exception.

(10) Examples.

(l) Electricity, natural gas, or potable water.

(1) In general.

(2) Natural gas.

(3) Potable water.

(4) Exceptions.

(i) Electricity.

(ii) Natural gas.

(iii) Potable water.

(iv) De minimis exception.

(A) DPGR.

(B) Non-DPGR.

(5) Example.

(m) Definition of construction performed in the United States.

(1) Construction of real property.

(i) In general.

(ii) Regular and ongoing basis.

(A) In general.

(B) New trade or business.

(iii) De minimis exception.

(A) DPGR.

(B) Non-DPGR.

(2) Activities constituting construction.

(i) In general.

(ii) Tangential services.

(iii) Other construction activities.

(iv) Administrative support services.

(v) Exceptions.

(3) Definition of real property.

(4) Definition of infrastructure.

(5) Definition of substantial renovation.

(6) Derived from construction.

(i) In general.

(ii) Qualified construction warranty.

(iii) Exceptions.

(iv) Land safe harbor.

(A) In general.

(B) Determining gross receipts and costs.

(v) Examples.

(n) Definition of engineering and architectural services.

(1) In general.

(2) Engineering services.

(3) Architectural services.

(4) Administrative support services.

(5) Exceptions.

(6) De minimis exception for performance of services in the United States.

(i) DPGR.

(ii) Non-DPGR.

(7) Example.

(o) Sales of certain food and beverages.

(1) In general.

(2) De minimis exception.

(3) Examples.

(p) Guaranteed payments.

§1.199-4   Costs allocable to domestic production gross receipts.

(a) In general.

(b) Cost of goods sold allocable to domestic production gross receipts.

(1) In general.

(2) Allocating cost of goods sold.

(i) In general.

(ii) Gross receipts recognized in an earlier taxable year.

(3) Special rules for imported items or services.

(4) Rules for inventories valued at market or bona fide selling prices.

(5) Rules applicable to inventories accounted for under the last-in, first-out (LIFO) inventory method.

(i) In general.

(ii) LIFO/FIFO ratio method.

(iii) Change in relative base-year cost method.

(6) Taxpayers using the simplified production method or simplified resale method for additional section 263A costs.

(7) Examples.

(c) Other deductions properly allocable to domestic production gross receipts or gross income attributable to domestic production gross receipts.

(1) In general.

(2) Treatment of net operating losses.

(3) W-2 wages.

(d) Section 861 method.

(1) In general.

(2) Deductions for charitable contributions.

(3) Research and experimental expenditures.

(4) Deductions allocated or apportioned to gross receipts treated as domestic production gross receipts.

(5) Treatment of items from a pass-thru entity reporting qualified production activities income.

(6) Examples.

(e) Simplified deduction method.

(1) In general.

(2) Eligible taxpayer.

(3) Total assets.

(i) In general.

(ii) Members of an expanded affiliated group.

(4) Members of an expanded affiliated group.

(i) In general.

(ii) Exception.

(iii) Examples.

(f) Small business simplified overall method.

(1) In general.

(2) Qualifying small taxpayer.

(3) Total costs for the current taxable year.

(i) In general.

(ii) Land safe harbor.

(4) Members of an expanded affiliated group.

(i) In general.

(ii) Exception.

(iii) Examples.

(5) Trusts and estates.

(g) Average annual gross receipts.

(1) In general.

(2) Members of an expanded affiliated group.

§1.199-5   Application of section 199 to pass-thru entities for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005.

(a) In general.

(b) Partnerships.

(1) In general.

(i) Determination at partner level.

(ii) Determination at entity level.

(2) Disallowed losses or deductions.

(3) Partner's share of paragraph (e)(1) wages.

(4) Transition rule for definition of W-2 wages and for W-2 wage limitation.

(5) Partnerships electing out of subchapter K.

(6) Examples.

(c) S corporations.

(1) In general.

(i) Determination at shareholder level.

(ii) Determination at entity level.

(2) Disallowed losses and deductions.

(3) Shareholder's share of paragraph (e)(1) wages.

(4) Transition rule for definition of W-2 wages and for W-2 wage limitation.

(d) Grantor trusts.

(e) Non-grantor trusts and estates.

(1) Allocation of costs.

(2) Allocation among trust or estate and beneficiaries.

(i) In general.

(ii) Treatment of items from a trust or estate reporting qualified production activities income.

(3) Transition rule for definition of W-2 wages and for W-2 wage limitation.

(4) Example.

(f) Gain or loss from the disposition of an interest in a pass-thru entity.

(g) No attribution of qualified activities.

§1.199-6   Agricultural and horticultural cooperatives.

(a) In general.

(b) Cooperative denied section 1382 deduction for portion of qualified payments.

(c) Determining cooperative's qualified production activities income and taxable income.

(d) Special rule for marketing cooperatives.

(e) Qualified payment.

(f) Specified agricultural or horticultural cooperative.

(g) Written notice to patrons.

(h) Additional rules relating to passthrough of section 199 deduction.

(i) W-2 wages.

(j) Recapture of section 199 deduction.

(k) Section is exclusive.

(l) No double counting.

(m) Examples.

§1.199-7   Expanded affiliated groups.

(a) In general.

(1) Definition of expanded affiliated group.

(2) Identification of members of an expanded affiliated group.

(i) In general.

(ii) Becoming or ceasing to be a member of an expanded affiliated group.

(3) Attribution of activities.

(i) In general.

(ii) Special rule.

(4) Examples.

(5) Anti-avoidance rule.

(b) Computation of expanded affiliated group's section 199 deduction.

(1) In general.

(2) Example.

(3) Net operating loss carrybacks and carryovers.

(4) Losses used to reduce taxable income of expanded affiliated group.

(i) In general.

(ii) Examples.

(c) Allocation of an expanded affiliated group's section 199 deduction among members of the expanded affiliated group.

(1) In general.

(2) Use of section 199 deduction to create or increase a net operating loss.

(d) Special rules for members of the same consolidated group.

(1) Intercompany transactions.

(2) Attribution of activities in the construction of real property and the performance of engineering and architectural services.

(3) Application of the simplified deduction method and the small business simplified overall method.

(4) Determining the section 199 deduction.

(i) Expanded affiliated group consists of consolidated group and non-consolidated group members.

(ii) Expanded affiliated group consists only of members of a single consolidated group.

(5) Allocation of the section 199 deduction of a consolidated group among its members.

(e) Examples.

(f) Allocation of income and loss by a corporation that is a member of the expanded affiliated group for only a portion of the year.

(1) In general.

(2) Coordination with rules relating to the allocation of income under §1.1502-76(b).

(g) Total section 199 deduction for a corporation that is a member of an expanded affiliated group for some or all of its taxable year.

(1) Member of the same expanded affiliated group for the entire taxable year.

(2) Member of the expanded affiliated group for a portion of the taxable year.

(3) Example.

(h) Computation of section 199 deduction for members of an expanded affiliated group with different taxable years.

(1) In general.

(2) Example.

§1.199-8   Other rules.

(a) In general.

(b) Individuals.

(c) Trade or business requirement.

(1) In general.

(2) Individuals.

(3) Trusts and estates.

(d) Coordination with alternative minimum tax.

(e) Nonrecognition transactions.

(1) In general.

(i) Sections 351, 721, and 731.

(ii) Exceptions.

(A) Section 708(b)(1)(B).

(B) Transfers by reason of death.

(2) Section 1031 exchanges.

(3) Section 381 transactions.

(f) Taxpayers with a 52-53 week taxable year.

(g) Section 481(a) adjustments.

(h) Disallowed losses or deductions.

(i) Effective dates.

(1) In general.

(2) Pass-thru entities.

(3) Non-consolidated EAG members.

(4) Computer software.

(5) Tax Increase Prevention and Reconciliation Act of 2005.

(6) Losses used to reduce taxable income of expanded affiliated group.

(7) Agricultural and horticultural cooperatives.

(8) Qualified film produced by the taxpayer.

(9) Expanded affiliated groups.

(10) Acquisitions, dispositions, and short taxable years.

§1.199-9   Application of section 199 to pass-thru entities for taxable years beginning on or before May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005.

(a) In general.

(b) Partnerships.

(1) In general.

(i) Determination at partner level.

(ii) Determination at entity level.

(2) Disallowed losses or deductions.

(3) Partner's share of W-2 wages.

(4) Transition percentage rule for W-2 wages.

(5) Partnerships electing out of subchapter K.

(6) Examples.

(c) S corporations.

(1) In general.

(i) Determination at shareholder level.

(ii) Determination at entity level.

(2) Disallowed losses or deductions.

(3) Shareholder's share of W-2 wages.

(4) Transition percentage rule for W-2 wages.

(d) Grantor trusts.

(e) Non-grantor trusts and estates.

(1) Allocation of costs.

(2) Allocation among trust or estate and beneficiaries.

(i) In general.

(ii) Treatment of items from a trust or estate reporting qualified production activities income.

(3) Beneficiary's share of W-2 wages.

(4) Transition percentage rule for W-2 wages.

(5) Example.

(f) Gain or loss from the disposition of an interest in a pass-thru entity.

(g) Section 199(d)(1)(A)(iii) wage limitation and tiered structures.

(1) In general.

(2) Share of W-2 wages.

(3) Example.

(h) No attribution of qualified activities.

(i) Qualifying in-kind partnership.

(1) In general.

(2) Definition of qualifying in-kind partnership.

(3) Special rules for distributions.

(4) Other rules.

(5) Example.

(j) Partnerships owned by members of a single expanded affiliated group.

(1) In general.

(2) Attribution of activities.

(i) In general.

(ii) Attribution between EAG partnerships.

(iii) Exception to attribution.

(3) Special rules for distributions.

(4) Other rules.

(5) Examples.

(k) Effective dates.