Source: https://es.slideshare.net/Umling/umling-expense-apportioning
Timestamp: 2019-04-26 14:48:26+00:00

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The IRS and Treasury Department issued interim, proposed, and final guidance on the domestic production activities deduction. 81 The regulations set forth three methods for allocating and apportioning expenses (other than cost of goods sold 82 ) for purposes of §199. 83 The principal method, “the §861 method,” utilizes the rules of Regs. §§1.861-8 through -17 (subject to modification). 84 Two simplified alternatives to the §861 method are, however, available to taxpayers that do not have gross receipts that exceed certain thresholds. 85 Under the “simplified deduction method,” available to taxpayers with average annual gross receipts of $100,000,000 or less, or total assets of $10,000,000 or less, deductions generally are apportioned ratably between DPGR and other gross receipts based on relative gross receipts. 86 The “small business simplified overall method,” available to taxpayers with average annual gross receipts of $5,000,000 or less, 87 generally permits deductions and cost of goods sold to be apportioned ratably between DPGR and other gross receipts based on relative gross receipts. 8881 Notice 2005-14, 2005-7 I.R.B. 498; REG-105847-05, 70 Fed. Reg. 67220 (11/4/05); T.D. 9263, 71 Fed. Reg. 31268 (6/1/06). T.D. 9263obsoleted Notice 2005-14 and adopted regulations effective for taxable years beginning on or after June 1, 2006. For taxable years beginning before June 1, 2006, a taxpayer may apply the final regulations provided the taxpayer applies all relevant provisions. A taxpayer choosing not to rely on the final regulations for pre-effective-date taxable years may rely upon a stated rule in either Notice 2005-14 or the proposed regulations. Regs. §1.199-8(i)(1).82 With respect to cost of goods sold, Regs. §1.199-4(b)(2) provides that a taxpayer should utilize a “reasonable method that is satisfactory to the Secretary based on all of the facts and circumstances” to allocate the cost of goods sold between DPGR and other gross receipts. An exception to these cost of goods sold rules is the small business simplified overall method of cost allocation (described below), which must be used for all costs.83Regs. §1.199-4(c).84Regs. §1.199-4(d).85Regs. §1.199-4(e), (f).86Regs. §1.199-4(e).87 The small business simplified overall method is also available to taxpayers with average annual gross receipts of $10,000,000 or less that are not prohibited from using the cash method under §448, including a partnership, an S corporation, a C corporation, or an individual and to taxpayers engaged in the trade or business of farming that are not required to use the accrual method of accounting under §447. Regs. §1.199-4(f)(2).88Regs. §1.199-4(f).
Consistent use in the application of expense allocation between operative code sections is required. However, the taxpayer may vary the application of allocation and apportionment from year to year.The IRS and Treasury Department issued interim, proposed, and final guidance on the domestic production activities deduction. 81 The regulations set forth three methods for allocating and apportioning expenses (other than cost of goods sold 82 ) for purposes of §199. 83 The principal method, “the §861 method,” utilizes the rules of Regs. §§1.861-8 through -17 (subject to modification). 84 Two simplified alternatives to the §861 method are, however, available to taxpayers that do not have gross receipts that exceed certain thresholds. 85 Under the “simplified deduction method,” available to taxpayers with average annual gross receipts of $100,000,000 or less, or total assets of $10,000,000 or less, deductions generally are apportioned ratably between DPGR and other gross receipts based on relative gross receipts. 86 The “small business simplified overall method,” available to taxpayers with average annual gross receipts of $5,000,000 or less, 87 generally permits deductions and cost of goods sold to be apportioned ratably between DPGR and other gross receipts based on relative gross receipts. 8881 Notice 2005-14, 2005-7 I.R.B. 498; REG-105847-05, 70 Fed. Reg. 67220 (11/4/05); T.D. 9263, 71 Fed. Reg. 31268 (6/1/06). T.D. 9263obsoleted Notice 2005-14 and adopted regulations effective for taxable years beginning on or after June 1, 2006. For taxable years beginning before June 1, 2006, a taxpayer may apply the final regulations provided the taxpayer applies all relevant provisions. A taxpayer choosing not to rely on the final regulations for pre-effective-date taxable years may rely upon a stated rule in either Notice 2005-14 or the proposed regulations. Regs. §1.199-8(i)(1).82 With respect to cost of goods sold, Regs. §1.199-4(b)(2) provides that a taxpayer should utilize a “reasonable method that is satisfactory to the Secretary based on all of the facts and circumstances” to allocate the cost of goods sold between DPGR and other gross receipts. An exception to these cost of goods sold rules is the small business simplified overall method of cost allocation (described below), which must be used for all costs.83Regs. §1.199-4(c).84Regs. §1.199-4(d).85Regs. §1.199-4(e), (f).86Regs. §1.199-4(e).87 The small business simplified overall method is also available to taxpayers with average annual gross receipts of $10,000,000 or less that are not prohibited from using the cash method under §448, including a partnership, an S corporation, a C corporation, or an individual and to taxpayers engaged in the trade or business of farming that are not required to use the accrual method of accounting under §447. Regs. §1.199-4(f)(2).88Regs. §1.199-4(f).
If a deduction is not definitely related to class of income then it is apportioned ratably to a statutory grouping.
The intent of the allocation and apportionment regulations is to provide guidelines for allocating and apportioning all deductions. The regulations highlight specific expenses and provide special rules for allocating and apportioning deductions for them. For all other deductions, the regulations provide general guidelines for their allocation and apportionment.The regulations do not allocate capital expenses, because such an expense is not deductible but is included in the basis of another asset (which itself may be depreciable or amortizable). Capital expenses include expenses subject to the uniform capitalization (UNICAP) rules and capitalizable interest expense.
1.861-9T(j) Modified Gross Income Method.Subject to rules set forth in paragraph (f)(3) of this section, the interest expense of a controlled foreign corporation may be allocated according to the following rules. 1.861-9T(j)(1) Single-Tier Controlled Foreign Corporation.In the case of a controlled foreign corporation that does not hold stock in any lower-tier controlled foreign corporation, the interest expense of the controlled foreign corporation shall be apportioned based on its gross income. 1.861-9T(j)(2) Multiple Vertically Owned Controlled Foreign Corporations.In the case of a controlled foreign corporation that holds stock in any lower-tier controlled foreign corporation, the interest expense of that controlled foreign corporation and such upper-tier controlled foreign corporation shall be apportioned based on the following methodology:1.861-9T(j)(2)(i) Step 1.Commencing with the lowest-tier controlled foreign corporation in the chain, allocate and apportion its interest expense based on its gross income as provided in paragraph (j)(1) of this section, yielding gross income in each grouping net of interest expense.1.861-9T(j)(2)(ii) Step 2.Moving to the next higher-tier controlled foreign corporation, combine the gross income of such corporation within each grouping with its pro rata share of the gross income net of interest expense of all lower-tier controlled foreign corporations held by such higher-tier corporation within the same grouping adjusted as follows:1.861-9T(j)(2)(ii)(A) Exclude from the gross income of the upper-tier corporation any dividends or other payments received from the lower-tier corporation other than interest subject to look-through under section 904(d)(3); and1.861-9T(j)(2)(ii)(B) Exclude from the gross income net of interest expense of any lower-tier corporation any subpart F income (net of interest expense apportioned to such income).Then apportion the interest expense of the higher-tier controlled foreign corporation based on the adjusted combined gross income amounts. Repeat this step 2 for each next higher-tier controlled foreign corporation in the chain. For purposes of this paragraph (j)(2)(ii), pro rata share shall be determined under principles similar to section 951(a)(2).
Consistent with its published position, the IRS, in a 2000 docketed Tax Court case, Ralston Purina v. Comr., challenged the taxpayer&apos;s ability to make a retroactive fair market value election. 428 In a significant change of position, however, on June 19, 2002, the IRS conceded that “the doctrine of election does not preclude [Ralston Purina] from amending its [past years’] income tax returns to elect retroactively to value assets according to their fair market values for purposes of apportioning interest expense under Temp. Treas. Regs. §§1.861-8T(c)(2) and 1.861-9T(g)(1)(ii).” Concurrent with its concession in Ralston Purina, the IRS issued Chief Counsel Notice 2002-27, 429 which states that:428 Ralston Purina v. Comr., T.C. Dkt. No. 7357-00.429 2002-1 C.B. 814.After careful reconsideration, the Service will no longer argue that the doctrine of election applies to preclude a taxpayer from amending past years’ returns to elect retroactively to value assets according to their fair market values for purposes of apportioning interest expense under Temp. Treas. Regs. §1.861-9T(g).
91. 83<br />Disclaimers<br /><ul><li>The informal comments and the information presented in these slides should not be construed as constituting tax advice applicable to any specific taxpayer because each taxpayer’s facts are different.

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