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 taxable 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. For this purpose, § 199(b)(2)(A) defines the term “W–2 wages” to mean, 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. Section 199(b)(2)(C) provides that W–2 wages 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.

Section 514(a) of TIPRA added § 199(b)(2)(B) to exclude from the term W–2 wages any amount that is not properly allocable to domestic production gross receipts for purposes of § 199(c)(1). Section 199(b)(2)(B) is effective with respect to taxable years beginning after the date of enactment, May 17, 2006. Temporary and final regulations have been issued to reflect the changes in the definition of W–2 wages made by TIPRA. Section 1.199–2T(e)(2) of the temporary regulations provides rules for applying the TIPRA limitation on W–2 wages under § 199(b)(2)(B).

This revenue procedure provides three methods for calculating paragraph (e)(1) wages. These methods for calculating paragraph (e)(1) wages are generally similar to the methods used to calculate W–2 wages before the amendment made by TIPRA as set forth in Rev. Proc. 2006–22, § 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 section 4.02 of Notice 2005–14, 2005–1 C.B. 498, 514. The first method (the unmodified Box method) allows for a sim

respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collection of information in this revenue procedure is found in section 7. The information in section 7 is required in order to determine whether the taxpayer properly obtained automatic approval to adopt, change, or retain its annual accounting period. The likely respondents are the following: partnerships, S corporations, electing S corporations, PSCs, and trusts. The estimated total annual burden for the requirements contained in section 7 of this revenue procedure is reflected in the burden estimates for Forms 1128 and 2553.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

DRAFTING INFORMATION

The principal authors of this revenue procedure are Jeffrey S. Marshall and Roy A. Hirschhorn of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Mr. Marshall at (202) 622–4960 (not a toll-free call).

26 CFR 1.199–2: Wage Limitation. (Also: 26 CFR 1.199–2T.)

Methods of Determining Paragraph (e)(1) Wages for Purposes of the § 199(b)(1) Wage Limitation on the § 199 Deduction

Rev. Proc. 2006–47