The Treasury Department and Internal Revenue Service issued final regulations for Section 199 of the tax code, which relates to domestic manufacturing deductions.

The agencies also issued proposed and temporary regulations for the application of Section 199 to certain transactions involving computer software, along with a revenue procedure that provides methods for calculating W-2 wages for Section 199.

The manufacturing deduction was enacted in October 2004 as part of the American Jobs Creation Act, and was recently modified by the Tax Increase Prevention and Reconciliation Act of 2005. The deduction generally equals 3 percent of income from domestic production activities for 2005 and, by 2010, 9 percent of income. Activities eligible for the deduction also include the development of computer software, film and music production, the production of electricity, natural gas, or water, as well as construction, engineering and architectural services.

The final regulations do not address the changes to section 199 made by the Tax Increase Prevention and Reconciliation Act of 2005. Those regulations are effective for taxable years beginning after May 17.

More information is available on the Treasury Department's Web site, at www.ustreas.gov/press/releases/reports/td9263.pdf.

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