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CHAPTER 3 CORPORATIONS: SPECIAL SITUATIONS LECTURE NOTES SUMMARY OF CHANGES IN THE CHAPTER The following are notable changes in the chapter from the 2008 Edition. For major content changes, see the Preface to the Instructor’s Edition of the text. News Boxes Added new Tax in the News titled DPAD Is a Tier 1 Issue . Added new Tax in the News titled New W-2 Limitations May Restrict Manufacturers Deduction. Text Changes The graphic for the domestic production activities deduction formula enhanced. Text materials expanded based on final regulations issued in May 2006 for § 199 (domestic production activities deduction) Added two safe harbor rules for W-2 wage amounts. QPAI and W-2 wages calculated at entity level. DOMESTIC PRODUCTION ACTIVITIES DEDUCTION (DPAD) 1. To improve the balance of trade and mitigate the effect of high corporate tax rates, the U.S. had the extraterritorial income (ETI) incentive. However, World Trade Organization found the ETI provisions to be an illegal export subsidy. 2. Congress repealed ETI incentive and created the domestic production activities deduction (DPAD) for U.S. manufacturers. DPAD is available to corporations, S corporations, partnerships, cooperatives, individuals, estates and trusts. 3-1
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3-2 2009 Annual Edition/Instructor’s Guide with Lecture Notes a. For 2007−2009, manufacturers may claim a deduction equal to 6% of qualified production income subject to several limitations. When fully phased in after 2009 the 9% DPAD can reduce a corporation’s tax rate by about 3 percentage points. (1) Important limitation on the DPAD is that it cannot exceed 50% of the W– 2 wages paid by the taxpayer for the tax year. This limitation preserves U.S. manufacturing jobs. (2) Since the DPAD requires no additional outlay, the overall tax effect is similar to that of a rate reduction or a tax credit. (3) DPAD does not directly reduce E & P, and FASB requires this benefit be reported as a special charge. b. DPAD introduces a number of terms and related acronyms. See Exhibit 3–1 in the text for a list of the more common acronyms found in § 199. Components of the Deduction 3. Formula for the DPAD for 2007−2009. a. Taxable income (modified AGI for individuals) limitation is determined without regard to DPAD and after any NOL deduction. b. If QPAI is not used because of the TI or AGI limitation, it cannot be carried forward. c. W–2 wages limitation. DPAD cannot exceed 50% of wages reported to employees on their W-2 statements. (1) After May 17, 2006, only wages properly allocated to domestic production gross receipts (DPGR) are considered as wages for this purpose. (2) W-2 wages do not include any amounts which are not reported to the Social Security Administration. Thus, payments to independent contractors, self-employed, foreign workers, or guaranteed payments are not W-2 wages. d.
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