New 90/10 Test for Prior Period Compensation

Section 199 DeductionThe IRS has issued a new Tier I Industry Director Directive on Domestic Production Deduction (DPD) #3 Field Directive Relating to Compensation and the Section 199 Deduction.

The new IRS directive permits the allocation and apportionment of certain pre-199 (i.e., pre-2005 year) compensation expenses currently deducted but attributable to prior periods.

Following the directive, by allocating certain compensation related expenses to non-DPGR income, a taxpayer can increase its QPAI calculation and thereby increase its Section 199 deduction.

In the new directive, the IRS has determined that it will not challenge the taxpayer’s computation of QPAI with respect to the amount of prior period compensation expense deduction taken into account in that calculation on returns that correctly apply the following approach with respect to that deduction:

  1. Determine the total amount of the prior period compensation expense deduction in the current year attributable to labor or personal services performed in a taxable year beginning before January 1, 2005 the effective date of I.R.C.
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