Deductions

Retailers may be eligible to claim a Sec. 199 deduction for advertising revenue derived from producing and distributing printed fliers in cooperation with vendors. This item reviews recent IRS guidance and considers what it might mean for taxpayers that are engaged in cooperative advertising arrangements.

The IRS’s Large Business and International exam division issued a directive instructing examiners not to challenge a taxpayer’s application of the safe harbor to “eligible milestone payments” incurred during the course of a covered transaction if the directive’s requirements are satisfied.

The de minimis safe harbor is one of the areas of the regulations where taxpayers have significant questions. This article answers some of the most frequently asked questions.

Directives issued by the IRS Large Business & International Division describe circumstances in which the IRS will not challenge the taxpayer’s position that it has the benefits and burdens of ownership for purposes of the Sec. 199 deduction.

The IRS in September issued proposed regulations clarifying the application of Sec. 174 to the costs to create “pilot models” or prototypes. The proposed rules state that the reason a taxpayer creates a prototype or other product, and not its subsequent sale or use, determines whether it qualifies under Sec. 174.

The IRS offers an elective safe harbor to deduct 70% of qualified success-based fees, and while certain “milestone payments” common to acquisition transactions do not qualify for the safe-harbor election, certain “eligible milestone payments” do. 

The exception for packaging, repackaging, labeling, or minor assembly activities does not apply to disqualify the taxpayer’s sales receipts from meeting the MPGE requirement under Sec. 199.

Donations of “off-spec” food may not result in a charitable contribution deduction greater than the tax basis of the food inventory  because of the difficulty of determining the proper tax basis and FMV for the food.