The IRS recently issued final, temporary and proposed regulations regarding the domestic production activities deduction (DPAD). The final and temporary regulations provide that taxpayers must consider W-2 wages paid during short taxable years in computing the W-2 wages limitation. Additionally, when a trade or business is disposed of during the taxable year, the W-2 wages must be allocated between the acquiring and disposing businesses based on the periods during which the employees were employed by each taxpayer. The regulations are effective for taxable years beginning on or after August 27, 2015. Taxpayers may apply the regulations to taxable years for which the statute of limitations for assessment has not yet expired.

Currently, the taxpayer with the benefits and burdens of ownership of qualifying production property during the period that the manufacturing activity occurred may claim the deduction. The proposed regulations remove this rule and provide that only the taxpayer that performs the manufacturing activity may claim the deduction. The proposed regulations also include rules regarding minor assembly, oil related QPAI, qualified films, activities in Puerto Rico, the determination of DPGR on an item by item basis, hedging transactions and other areas. Comments on the proposed regulations are due November 25, 2015 and a public hearing on the proposed regulations will be held December 16, 2015.

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