SECTION 1. PURPOSE

This revenue procedure provides methods used as part of calculating W–2 wages for purposes of § 199(b)(1) of the Internal Revenue Code, which limits the amount of the § 199 deduction for income attributable to domestic production activities to 50 percent of the W–2 wages of the taxpayer for the taxable year.

Section 514(a) of the Tax Increase Prevention and Reconciliation Act of 2005 (Public Law 109–222) (TIPRA) imposes a new limitation on W–2 wages for purposes of § 199 for taxable years beginning after May 17, 2006. Under the change made by TIPRA, W–2 wages, for purposes of § 199, include only amounts that are properly allocable to domestic production gross receipts (DPGR) for purposes of § 199(c)(1). Thus, to determine such W–2 wages for taxable years beginning after May 17, 2006, it is necessary to determine the amount that would have been W–2 wages for purposes of § 199 before the amendment by TIPRA and then to determine the portion of that amount properly allocable to DPGR.

This revenue procedure provides methods for calculating the amount of wages described in § 1.199–2(e)(1) of the Income Tax Regulations (“paragraph (e)(1) wages”). Section 1.199–2T(e)(2) of the temporary Income Tax Regulations provides that the term W–2 wages includes only paragraph (e)(1) wages that are properly allocable to DPGR for purposes of § 199(c)(1). Thus, for taxable years covered by this revenue procedure, a taxpayer first determines the amount of paragraph (e)(1) wages under this revenue procedure and then applies § 1.199–2T(e)(2) to determine the amount of W–2 wages.

Section 1.199–2(e)(3) of the regulations provides the Internal Revenue Service with authority to issue guidance providing the methods that may be used to calculate W–2 wages. Section 1.199–2(e)(3) is effective for taxable years beginning on or after June 1, 2006. In Rev. Proc. 2006–22, 2006–23 I.R.B. 1033, the Internal Revenue Service provided methods for calculating W–2 wages for taxpayers who choose to apply the final regulations to taxable years beginning before June 1, 2006, but only for taxable years beginning on or after January 1, 2005, and on or before May 17, 2006. For taxable years covered by this revenue procedure, this revenue procedure provides methods to determine paragraph (e)(1) wages, but taxpayers must then subject such wages to the limitation contained in § 1.199–2T(e)(2) of the temporary regulations to determine W–2 wages.

2006–45 I.R.B. 869 November 6, 2006

situation, paragraph (e)(1) wages are allocated based on whether the wages are for employment for a period during which the employee was employed by the predecessor or for employment for a period during which the employee was employed by the successor, regardless of which permissible method for Form W–2 reporting is used. See § 1.199–2(c) of the regulations.

.07 Non-duplication rules . Amounts that are treated as paragraph (e)(1) wages for a taxable year under any method of calculating paragraph (e)(1) wages shall not be treated as paragraph (e)(1) wages for any other taxable year. Thus, for example, an amount of nonqualified deferred compensation that is treated as paragraph (e)(1) wages under the Unmodified Box Method described in section 5.01 of this revenue procedure shall not be treated as paragraph (e)(1) wages in any other taxable year. Also, an amount shall not be treated as paragraph (e)(1) wages by more than one taxpayer. See section 1.199–2(d) of the regulations.

.08 Trade or business requirement . Pursuant to § 1.199–8(c)(1), the term paragraph (e)(1) wages only includes those wages paid to employees of the taxpayer that are attributable to the actual conduct of a trade or business of the taxpayer. For example, remuneration paid to an employee for domestic service performed in the private home of the taxpayer is not included in paragraph (e)(1) wages of the taxpayer.