SECTION 2. BACKGROUND

Section 199(a) provides a deduction for an amount equal to a percentage of the lesser of (A) the qualified production activities income of the taxpayer for the taxable year, or (B) taxable income (determined without regard to § 199) for the tax

able year (or, in the case of an individual, adjusted gross income).

Section 199(b)(1) provides that the amount of the deduction allowable under § 199(a) for any taxable year shall not exceed 50 percent of the W–2 wages of the taxpayer for the taxable year.

Section 199(b)(2) provides that, for purposes of § 199, the term “W–2 wages” means, with respect to any person for any taxable year of such person, the sum of the amounts described in § 6051(a)(3) and (8) paid by such person with respect to employment of employees by such person during the calendar year ending during such taxable year. Such term shall not include any amount that is not properly included in a return filed with the Social Security Administration (SSA) on or before the 60th day after the due date (including extensions) for such return.

This revenue procedure provides three methods for calculating W–2 wages for purposes of § 199(b)(1). These methods are generally the same as were set forth in both § 1.199–2 of the proposed regulations that were published in the Federal Register on November 4, 2005 (REG–105847–05, 2005–47 I.R.B. 987

[70 FR 67220]), and in section 4.02 of Notice 2005–14, 2005–1 C.B. 498, 514. The first method (the unmodified Box method) allows for a simplified calculation while the second and third methods (the modified Box 1 method and the tracking wages method) provide greater accuracy.

Section 514(a) of TIPRA amended § 199(b)(2) by excluding from the term W–2 wages any amount that is not properly allocable to domestic production gross receipts for purposes of § 199(c)(1). This amendment made by TIPRA is effective with respect to taxable years beginning after the date of enactment, May 17, 2006. The IRS and Treasury Department plan on issuing regulations and a new revenue procedure reflecting the amendment made to § 199(b)(2) by TIPRA. It is expected that any new revenue procedure will contain methods for calculating W–2 wages similar to the three methods in this revenue procedure, but will reflect the additional limitation on W–2 wages imposed by TIPRA. Because of the amendment by TIPRA, the guidance provided by this revenue procedure does not apply to taxable

2006–23 I.R.B. 1033 June 5, 2006

amount of designated Roth contributions (as defined in § 402A).

.02 Correlation with Form W–2 . Under the 2005 and 2006 Forms W–2, the elective deferrals under § 402(g)(3) and the amounts deferred under § 457 directly correlate to coded items reported in Box 12 on Form W–2. Box 12, Code D is for elective deferrals to a § 401(k) cash or deferred arrangement (plan); Box 12, Code E is for elective deferrals under a § 403(b) salary reduction agreement; Box 12, Code F is for elective deferrals under a § 408(k)(6) salary reduction Simplified Employee Pension (SEP); Box 12, Code G is for elective deferrals and employer contributions (including nonelective deferrals) to any governmental or nongovernmental § 457(b) deferred compensation plan; and Box 12, Code S is for employee salary reduction contributions under a § 408(p) SIMPLE (simple retirement account). Under the 2006 Form W–2, the amount of designated Roth contributions (as defined in § 402A) directly correlates to Box 12, Code AA for designated Roth contributions to a § 401(k) plan and Box 12, Code BB for designated Roth contributions under a § 403(b) salary reduction agreement. However, designated Roth contributions are also reported in Box 1, Wages, tips, other compensation, and Box 5, Medicare wages and tips, and are subject to income tax withholding.