Section 199: How Will Recent Amendments and New Guidance Affect Your Deduction?

Enacted as part of the American Jobs Creation Act of 2004, section 199 of the Internal Revenue Code provides a new permanent deduction for qualifying activities, including domestic production, construction, and engineering or architectural services. The Tax Technical Corrections Act of 2005 and the proposed regulations have made significant changes to the rules under section 199. These new rules provide additional opportunities to qualify property and increase the amount of the section 199 deduction through important changes such as the shrinkback and EACG partnership rules. Other rules, such as the change in the treatment of net operating losses and exclusion of gain from the disposition of land, foreclose opportunities. The changes simplify compliance through safe harbors and de minimis rules, yet also introduce complicated new procedures that may not fit with existing accounting methodologies. Understanding and applying these new rules, and taking advantage of their opportunities while managing their challenges, will be critical to a proper determination of a taxpayer's section 199 deduction.