Discussion:Domestic production activities deduction - wages?

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Discussion Forum Index --> Tax Questions --> Domestic production activities deduction - wages?

Kateherman (talk|edits) said:

4 February 2006
I'm getting conflicting reports on whether officer salaries qualify as wages for this deduction. they seem to according to Notice 2005-14, but Lacerte issued a bulletin saying no and took them out of their calculation... Lacerte seems to think "common law employees" do not include officer, but the way i read it all W-2 wages are good. any opinions?

Riley2 (talk|edits) said:

4 February 2006
Sorry to disagree with Lacerte. They are definitely wrong if they say that salaries of officers are not included.

Quoting directly Notice 2005-14, “For purposes of this calculation, employees of the taxpayer are limited to employees as defined by § 3121(d)(1) and (d)(2) (that is, officers of a corporate taxpayer and employees of the taxpayer under the common law rules)”.

This means that all of the Section 3121(d)(1) and 3121(d)(2) employees are included in the calculation. Sec. 3121(d)(1) employees are officers of a corporation. Sec. 3121(d)(2) employees are common-law employees.

Incidentally, Proposed Regulation § 1.199-2(a) contains the same language cited above.

Dwilliamson (talk|edits) said:

7 February 2006
I agree with Riley2. He is accurately quoting IRS Notice 2005-14. I'm a Lacerte user and don't see where they are taking officer wages out of the calculation on screen 16 - Business Income (this is for a Schedule C taxpayer - I haven't looked to see if it is different for a corporation).

Kcyoumans (talk|edits) said:

8 February 2006
When you go to Lacerte Help Center and type in Domestic Production Activities it comes up with a section help you enter the information. It says in the help part not to include Officer Compensation. This is in the S-Corporation Return.

Kcyoumans (talk|edits) said:

8 February 2006
Any suggestions as to how to go about this deduction? I have a sign company and they manufacture signs but they also repair signs and do crane services. They haven't separated out any income or deductions to do this Domestic Production Activity. I would appreciate any advise as to how to go about this calculation. Is one method better than the other for calculating the deduction? Do I allocate the wages based on the percentage of sign production to gross income? Are wages all I need to consider? I have alot of confusion on this.

Brianh (talk|edits) said:

8 February 2006
I'm the lead developer of the Lacerte federal 1120 program. Based on the latest information we have received from IRS contacts, officer compensation should be included in W-2 wages for purposes of the Domestic Production Activities Deduction.

Concerning the Lacerte program's exclusion of officer compensation, our 1120 and 1120S programs initially included officer compensation in W-2 wages. However, the Gulf Opportunity Zone Act (GOZA) of 2005 contained numerous technical corrections to IRC Section 199, and in researching these corrections, we read an analysis in an online research product stating that officer compensation should be excluded from W-2 wages (based on information contained in a Committee Report). While we sought confirmation of this, we excluded officer compensation from the automatic calculation of W-2 wages in the subsequent release, though overrides were available.

An Internet Update for the Lacerte 1120 and 1120S programs will be available later this week which includes some recently finalized forms as well as a change to include officer compensation in W-2 wages for the DPAD. Please note that Form 8903 is still a draft in our program. Regarding what Lacerte is doing, I hope that helps.

UtahCPALady (talk|edits) said:

7 March 2006
In this discussion, it hasn't been brought out that the wages are limited to 6% of QPAI for a S Corporation. I have read in the master tax guide on paragraph 312 and it explains this. I think that this is critical and needs to be addressed. If not limited by the 6% it could allow for an excess deduction and IRS attention. My interpretation from the master tax guide is that the shareholder wages are limited by the 6%, irrespective of the additional wages. From the instructions of form 8903, on the IRS website, it doesn't clarify if the 6% is limiting the S corportion officer wages or all S corporation wages. What is your intrepretation?

Riley2 (talk|edits) said:

8 March 2006
For S corporation shareholders, the pass-through limit on W-2 wages is the lower of the following amounts: 1) the allocable share of W-2 wages, as defined in Sec. 6051(a); and 2) 2 times 3 percent of the qualified production activities income allocated to that shareholder. See Sec. 199(d)(1)(A)(iii).

Thus, the answer to your question is that all wages are limited by the 6% limitation. Note that the limitation will be raised to 12% in 2007.

Mjjacobson (talk|edits) said:

4 March 2007
I have a question regarding the wages used to calculate the credit. Lacerte is taking all the wages paid by the S-corp. Is that correct or is it only the wages allocable to the activities that qualify for the credit? Thanks for your help.

Kevinh5 (talk|edits) said:

4 March 2007
For 2006 all wages paid by the entity (with some restrictions), for 2007 only wages relating to QPAI

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