SECTION 3. CALCULATION — Internal Revenue Bulletin 2007-23

ALLOCATION OF QPAI AND W–2 WAGES AT THE ENTITY LEVEL

.01 Entities eligible to calculate QPAI and W–2 wages at the entity level . Pursuant to § 1.199–5T(b)(1)(ii) and (c)(1)(ii), each of the following entities (eligible entity) may calculate QPAI and W–2 wages on behalf of its partners or shareholders:

(a) an eligible § 861 partnership (as defined in section 5.01 of this revenue procedure), but only on behalf of qualifying partners;

(b) an eligible widely-held pass-thru entity (as defined in section 5.02 of this revenue procedure); and

.02 Ineligible entities . Qualifying in-kind partnerships (under § 1.199– 3T(i)(7)) and EAG partnerships (as described in § 1.199–3T(i)(8)) may not compute a partner’s share of QPAI and W–2 wages at the entity level.

.03 Cost allocation methods for calcu- lating QPAI and W–2 wages at the entity level . An eligible entity may choose to calculate QPAI and W–2 wages at the entity level (subject to the limitations and requirements set forth in this revenue procedure) for any taxable year in which it qualifies as an eligible entity. The cost allocation methods available to an eligible entity choosing to report under this revenue procedure are as follows.

(a) Section 861 method . An eligible § 861 partnership (as defined in section 5.01 of this revenue procedure) choosing to calculate QPAI and W–2 wages at the entity level must use the § 861 method of § 1.199–4(d), subject to section 3.03(d) of this revenue procedure. A partnership using this method may use the wage expense safe harbor under § 1.199–2T(e)(2)(ii), or another reasonable method that is satisfactory to the Secretary based on all of the facts and circumstances, to calculate W–2 wages at the entity level.

(b) Simplified deduction method . An eligible widely-held pass-thru entity (as defined in section 5.02 of this revenue procedure) choosing to calculate QPAI and W–2 wages at the entity level must use the simplified deduction method of § 1.199–4(e), subject to section 3.03(d) of this revenue procedure. A partnership or S corporation using this method may use the wage expense safe harbor under § 1.199–2T(e)(2)(ii), or another reasonable method that is satisfactory to the Secretary based on all of the facts and circumstances, to calculate W–2 wages at the entity level.

(c) Small business simplified overall method . An eligible small pass-thru entity (as defined in section 5.03 of this revenue procedure) choosing to calculate QPAI and W–2 wages at the entity level must use the small business simplified overall method of § 1.199–4(f), subject to section 3.03(d) of this revenue procedure. A partnership or S corporation using this method also may use the small business simplified overall method safe harbor under § 1.199–2T(e)(2)(iii), or another reasonable method that is satisfactory to the Secretary based on all of the facts and circumstances, to calculate W–2 wages at the entity level.

(d) Entities eligible to use more than one allocation method . A partnership or S corporation meeting the qualifications of more than one type of eligible entity may choose to use any one of the methods, as described in section 3.03(a) through (c) of this revenue procedure, for calculating QPAI and W–2 wages at the entity level for which it is eligible for the taxable year. For example, an entity that qualifies as both an eligible widely-held pass-thru entity and an eligible small pass-thru entity for a taxable year may choose to use either the simplified deduction method of

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cluded in such items of income, and paragraph (e)(1) wages), for purposes of calculating the § 199 deduction at the partner or shareholder level. See § 1.199–5T(b) and (c).

.02 Reporting exception . Section 199(d)(5) provides that § 199 is applied by only taking into account items that are attributable to the actual conduct of a trade or business. For example, a securities partnership (as defined in § 1.704–3(e)(3)(iii)) not engaged in a trade or business need not include on its Schedule K–1 (or other relevant form) any items required solely for § 199, unless a partner requests this information.

.03 Partners in eligible § 861 partner- ships . Pursuant to § 6031(b), an eligible § 861 partnership that chooses to calculate QPAI and W–2 wages at the entity level reports allocable shares of QPAI and W–2 wages directly to those partners that were qualifying partners (as defined in section 5.04 of this revenue procedure) at all times during the partnership’s taxable year (or, if such partners were partners for less than the entire taxable year, for the portion of the partnership’s taxable year during which they were partners). A qualifying partner must use its share of QPAI and W–2 wages as reported by the partnership in calculating its § 199 deduction. If an eligible § 861 partnership has partners that are not qualifying partners (as defined in section 5.04 of this revenue procedure), it must allocate (in accordance with §§ 702 and 704) and report to each such partner that partner’s allocable share of the partnership’s items of income, gain, loss, and deduction, CGS allocated to such items of income, gross receipts included in such items of income, and paragraph (e)(1) wages, so that the partner is able to calculate its § 199 deduction. To the extent that any partner that is not a qualifying partner is allocated its share of the partnership’s items (rather than a share of the partnership’s QPAI and W–2 wages), such items shall not be taken into account for purposes of calculating the QPAI and W–2 wages to be allocated to the qualifying partners.

.04 Partners or shareholders in eligi- ble widely-held pass-thru entities or eligi- ble small pass-thru entities . Pursuant to § 6031(b) or § 6037(b), an eligible widelyheld pass-thru entity or an eligible small pass-thru entity that chooses to calculate QPAI and W–2 wages at the entity level

the partner or shareholder level must be disregarded by the partnership or S corporation;

(f) Any expenditure described in § 59(e)(2), regarding the optional writeoff provided for certain tax preferences, must be taken into account by the partnership or S corporation without regard to any election by the partner or shareholder;

(g) Any expenditure which, at the election of the partner or shareholder, may be taken into account as a deduction or as a credit, must be disregarded by the partnership or S corporation;

(h) Any depletion deduction described in § 613A must be computed and taken into account by the partnership or S corporation without regard to any limitations at the partner or shareholder level;

(i) Any increase or decrease in the bases of partnership assets pursuant to § 743 must be taken into account by the partnership;

(j) Any partnership items allocated by an eligible § 861 partnership to a partner that is not a qualifying partner (including items allocated to such a partner pursuant to § 704(c)) must be excluded by the partnership for purposes of calculating the QPAI and W–2 wages to be allocated to its qualifying partners (see section 4.03 of this revenue procedure); and

(k) The QPAI computed at the entity level (and thus the QPAI allocated to each partner or shareholder) will be less than zero if the entity’s DPGR does not exceed the sum of the entity’s items to be deducted in computing QPAI.

.06 Allocation of QPAI and W–2 wages calculated at the entity level .

(a) QPAI . Generally, an eligible entity that calculates QPAI at the entity level for a taxable year must allocate its QPAI for that taxable year among its partners or shareholders in the same proportion as gross income is allocated to its partners or shareholders for that taxable year. However, if such an entity has no gross income for a taxable year, then it must allocate QPAI in that year among its partners or shareholders in proportion to its partners’ profits interests or shareholders’ ownership interests.

(b) W–2 wages . An eligible entity that calculates QPAI at the entity level for the entity’s taxable year also must calculate W–2 wages for that taxable year by determining the amount of paragraph (e)(1)

wages that is properly allocable to DPGR for purposes of § 199(c)(1). The eligible entity then allocates its W–2 wages among its partners or shareholders in the same manner as it allocates wage expense among its partners or shareholders for that taxable year.