REG-105847-05 provides more than 200 pages of proposed regulations to assist taxpayers with IRC §199 compliance. The qualified domestic production deduction (QDPD) is available to most "producers" of tangible property, computer software, movies, sound recordings, agricultural crops, mined minerals; and most construction contractors. For 2005, qualified taxpayers are permitted to claim a deduction of 3 percent of their otherwise taxable income from a "production activity." Owners of pass-through entities will claim the deduction on their tax returns using information reported to them in their Schedules K-1s. E. Lynn Nichols, CPA, and John L. Norman, Jr., JD, help us understand the fine points of how IRC §199 will work.

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Chapter 1 provides a basic explanation of who is eligible to claim the QDPD, how to calculate the deduction, how to allocate costs between qualifying and nonqualifying activities, and how to apply the simplified methods that are available for small business taxpayers. Jack and Lynn also offer suggestions for construction contractors, real estate developers, and personal service corporations.

Chapter 2 contains in-depth commentary by John L. Norman, Jr., JD, on recent guidance on the QDPD and how to implement the rules in a variety of situations.

Chapter 3 contains extensive review problems that help illustrate the topics covered in Chapters 1 and 2.

• Know what constitutes a "qualified production activity"

• Understand how to calculate the QDPD

• Be able to determine the W-2 wage limitation

• Be familiar with the safe harbor and de minimis rules for the QDPD

• Know how to allocate cost of goods sold and other deductions to qualifying production activities

• Understand how to apply the shrink back rule

• Be familiar with the rules for NOLs and carryovers

John L. Norman, JD, is an attorney in private practice in Washington, D.C., where he specializes in closely held business organizations, as well as estate and financial planning. He is the former National Director of Taxation for the accounting firm Pannell Kerr Forster, and the Director of Tax Policy for Potomac Electric Power Company. He is presently a senior faculty member at the Keller Graduate School of Management, and previously taught at William and Mary and George Washington University.

E. Lynn Nichols, CPA, is the founder of Nichols Education Corporation, a developer of continuing education seminars for CPAs. He is a highly rated tax conference speaker and serves as an advisor to a number of local CPA firms on tax practice quality control issues, complex tax matters, and tax controversies. He serves his clients from an office in New Castle, Pennsylvania.