Sec. 199 final regs. affect online software and advertising.Sec. 199 generally provides a deduction deduction, in logic, form of inference such that the conclusion must be true if the premises are true. For example, if we know that all men have two legs and that John is a man, it is then logical to deduce that John has two legs. for qualifying domestic production activities equal to 9% (3% for tax years beginning in 2005 or 2006 and 6% for tax years beginning 2007-2009) of the lesser of the taxpayer's (1) qualified production activities income for the tax year or (2) taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. , determined without regard to Sec. 199. On March 19, 2007, Treasury issued final regulations under Sec. 199 (TD 9317) regarding online software and the treatment of advertising income. The final regulations, which differ slightly from the temporary and proposed regulations under Sec. 199 issued 10 months earlier, generally are effective for tax years beginning after March 19, 2007, but taxpayers may elect to apply them retroactively ret·ro·ac·tive adj. Influencing or applying to a period prior to enactment: a retroactive pay increase. [French rétroactif, from Latin to tax years beginning after 2004 (Sec. 199's effective date) and before March 20, 2007. The final regulations affect taxpayers that produce computer software and provide access to it for a customer's direct use while connected to the Internet or any other public or private communications network The transmission channels interconnecting all client and server stations as well as all supporting hardware and software. . Online Software Safe-Harbor Exceptions Shortly after Sec. 199's enactment, the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. and Treasury issued Notice 2005-14 to provide taxpayers with interim guidance in computing computing - computer the new deduction. (For a discussion, see Gibbs and Rathnau, Tax Clinic, "Notice 2005-14 Offers Sec. 199 Guidance," TTA TTA Telecommunications Technology Association (Korea) TTA Teacher Training Agency (UK) TTA Triangle Transit Authority (Raleigh/Chapel Hill/Durham, North Carolina, USA) , June 2005, p. 339.) That guidance set forth the general position that the use of computer software online by customers is a service, and not a lease, rental, license, sale, exchange or other disposition of the software. Accordingly, gross receipts the total of the receipts, before they are diminished by any deduction, as for expenses; - distinguished from net profits. - Bouvier. See under Gross, a. os> See also: Gross Receipt derived from such customers do not constitute domestic production gross receipts (DPGR DPGR Digital Photography Greece DPGR Domestic Production Gross Receipts ), because they are not attributable to a qualifying disposition of the software. In subsequent guidance (i.e., the temporary regulations and, most recently, the final regulations) regarding the treatment of computer software under Sec. 199, Treasury and the IRS have continued to maintain the position that the use of computer software online by customers is a service. However, such guidance also has included two safe-harbor exceptions that, if met, treat gross receipts derived from the use of computer software online by customers as being derived from a qualifying disposition of the software (and, thus, treat such receipts as DPGR). Safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. #1: Under the first safe-harbor exception, Kegs. Sec. 1.199-3(i)(6)(iii)(A), gross receipts derived from providing computer software for customer use online will be treated as DPGR if(l) the taxpayer sells the software both online and affixed af·fix tr.v. af·fixed, af·fix·ing, af·fix·es 1. To secure to something; attach: affix a label to a package. 2. to a tangible medium (e.g., a CD) or via an Internet download To receive a file transmitted over a network. In any communications session, "download" means receive, and "upload" means send. The download/upload often implies a big/little scenario, in which data is being downloaded from the "big" server into the "little" user's computer. , (2) the software has only minor or immaterial Not essential or necessary; not important or pertinent; not decisive; of no substantial consequence; without weight; of no material significance. immaterial adj. differences from the online software and (3) the software has been manufactured, produced, grown or extracted by the taxpayer in whole or in significant part in the U.S. Safe harbor #2: Under the second safe-harbor exception, Regs. Sec. 1.199-3 (i) (6) (iii) (B), gross receipts derived from providing computer software that has been manufactured, produced, grown or extracted by the taxpayer in whole or in significant part in the U.S. for customer use online will be treated as DPGR if "another person" sells "substantially identical" software to its customers affixed to a tangible medium or via an Internet download. Regs. Sec. 1.199-3(i)(6)(iv)(A) defines substantially identical software as software that (1) from a customer's perspective, has the same functional result as the online software and (2) has a significant overlap of features or purposes with the online software. The final regulations do not define "significant" overlap of features; unfortunately, the two examples in the final regulations do not offer substantive guidance. Comments While the two safe-harbor exceptions are largely the same in the final regulations as in the temporary ones, the final regulations made certain noteworthy changes. First, in response to comments, Kegs. Sec. 1.199-3(i)(6) (iii) clarifies that both exceptions extend to computer software for which access is provided over any public or private communications network, not just the Internet. Second, Kegs. Sec. 1.199-3(i)(6)(iii)(B) contains a potentially significant word change for the second safe-harbor exception. Under the final regulations, the taxpayer's software comparison is made with respect to "another person," Under the temporary regulations, the comparison was made with respect to "an unrelated person" Treasury officials have stated informally that the language was changed to ensure that the second safe-harbor exception applies when a taxpayer provides online software through one entity and a related party to the taxpayer provides the same software to customers affixed to a tangible medium or by an Internet download. Treasury and the Service specifically rejected comments to expand the safe-harbor exceptions to cover all use of computer software online. Taxpayers noted that the computer software industry is continually evolving; in the future, more software may be available only online, thus limiting the potential applicability of the two safe-harbor exceptions (i.e., over time, fewer taxpayers will be able to meet either safe harbor). Treasury and the IRS clearly recognized this point, but felt constrained con·strain tr.v. con·strained, con·strain·ing, con·strains 1. To compel by physical, moral, or circumstantial force; oblige: felt constrained to object. See Synonyms at force. 2. by the Sec. 199 statutory language requiring a lease, rental, license, sale, exchange or other disposition of the computer software. In their view, the two safe-harbor exceptions were narrowly tailored to satisfy that language. Accordingly, Treasury and the Service thought it inappropriate to expand the exceptions further as part of the final regulations; see the preamble A clause at the beginning of a constitution or statute explaining the reasons for its enactment and the objectives it seeks to attain. Generally a preamble is a declaration by the legislature of the reasons for the passage of the statute, and it aids in the interpretation of to TD 9317. Online Software Advertising Prior to issuance of the final regulations, advertising income derived from (1) advertisements placed in newspapers, magazines, telephone directories, periodicals and other similar printed publications (collectively, "newspapers") and (2) advertisements and products placed or integrated into a qualified film qualified as DPGR. if the gross receipts from the disposition of the underlying qualified property (i.e., newspaper or qualified film) were (or would be) DPGR. The final regulations extend the favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. advertising rules to certain computer software. Specifically, DPGR now includes advertising income derived from advertisements and products placed or integrated into computer software that is either affixed to a tangible medium or provided through an Internet download; see Regs. Sec. 1.199-3(i) (5) (ii) (B). Significantly, the favorable advertising rule does not extend to advertisements and products placed or integrated into online software; see Regs. Sec. 1.199-3 (i) (6) (iv) (F). Commentators had requested such an extension, but it was rejected. As noted above, Treasury and the IRS felt constrained by the Sec. 199 statutory language and the need for a qualifying disposition of computer software. Conclusion While the final regulations made only slight changes to the online software rules, many taxpayers nonetheless will be affected by them. For example, taxpayers that produce computer software and provide access to it for a customer's direct use while connected to any public or private communications network (not just the Internet) may qualify gross receipts derived from these activities as DPGR. Moreover, taxpayers that derive gross receipts from advertising or product placements integrated in the software may qualify such receipts as DPGR. Thus, the changes made in the final regulations provide additional taxpayers with the opportunity to take advantage of the Sec. 199 deduction. Sec. 199 is not a method of accounting but, rather, a permanent deduction. Because of the final regulations' retroactive Having reference to things that happened in the past, prior to the occurrence of the act in question. A retroactive or retrospective law is one that takes away or impairs vested rights acquired under existing laws, creates new obligations, imposes new duties, or attaches a applicability, affected taxpayers can amend previously filed tax returns to avail themselves of the favorable rules (e.g., the advertising rule applicable to certain computer software) contained therein. FROM LAURA Laura, subject of the love poems of Petrarch. She is thought to be Laura de Noves (1308?–1348), wife of Hugo de Sade, but this has not been proved. Laura Petrarch’s perpetual, unattainable love. [Ital. Lit. VALESTIN, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , WASHINGTON, DC |
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