The IRS Large Business and International (LB&I) division today publicly released a directive as guidance for LB&I examiners concerning taxpayer claims for an additional domestic production activity deduction (DPAD) under now-repealed section 199.
The LB&I directive* (LB&I-04-1118-016, dated November 21, 2018):
* An LB&I directive is a memorandum from the LB&I Division Commissioner within the Internal Revenue Service (IRS) to IRS directors and field specialists in order to provide notice and field direction on the application of a particular section or concept within the Internal Revenue Code.
Prior to being repealed, section 199 generally provided for a tax deduction equal to 9% of the lesser of (1) the qualified production activities income (QPAI) of the taxpayer for the tax year, or (2) the taxpayer’s taxable income for the tax year. The amount of the deduction allowable for any tax year was limited to 50% of the W-2 wages of the taxpayer for the tax year properly allocable in the determination of QPAI.
The new U.S. tax law (Pub. L. No. 115-97) repealed the DPAD under section 199 for tax years beginning after December 31, 2017. As noted in the LB&I directive, claims for the DPAD for 2018 or later years are not to be made unless one of the following situations applies:
LB&I has established a process to risk assess section 199-related amended returns and claims for refund for tax years prior to the repeal of section 199. Claims for refund filed with the IRS Service Center in Ogden, Utah, or with an examiner will be “risk assessed.” According to the directive, materiality will be considered during the risk review process.
The LB&I directive provides:
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