OK, Domestic Production Activities Deduction

[WhiteOleander]

Working on Form 8903 for a client's 1040. He owns 100% of two S-Corps that are qualified to pass this deduction through. Other than him being the sole S/H, the S-Corps are not connected. I also prepare the 1120s's

My question is, do I have to net the income from each corp for the 8903? As example, one corp had about a 80,000 gain the other has about a 41,000 gain. Now, when I adjust these for the Sec 179, one gain goes to about 70,000 and the other has about a 1200 loss.

Is the corp with the loss still allowed to pass the loss through as QPAI? If so would it net with the other corp gain?

I'm thinking that the corp with the loss doesn't meet the requirements because it is limited to the lesser of 3% of the QPAI or wages. So, there's actually no QPAI

I have been reading all day and I just can't get this sorted out. I think I'm making this too hard.

[Bees Knees]

Regulation Section 1.199-9(c) says the following:

S corporations—(1) In general—(i) Determination at shareholder level. The section 199 deduction with respect to the qualified production activities of an S corporation is determined at the shareholder level. As a result, each shareholder must compute its deduction separately. The section 199 deduction will have no effect on the basis of a shareholder's stock in an S corporation. Except as provided by publication pursuant to paragraph (c)(1)(ii) of this section, for purposes of this section, each shareholder is allocated, in accordance with section 1366, its pro rata share of S corporation items (including items of income, gain, loss, and deduction), CGS allocated to such items of income, and gross receipts included in such items of income, even if the shareholder's share of CGS and other deductions and losses exceeds DPGR, and regardless of the amount of the shareholder's share of the W-2 wages of the S corporation for the taxable year. Except as provided by publication under paragraph (c)(1)(ii) of this section, to determine its section 199 deduction for the taxable year, the shareholder aggregates its pro rata share of such items, to the extent they are not otherwise disallowed by the Code, with those items it incurs outside the S corporation (whether directly or indirectly) for purposes of allocating and apportioning deductions to DPGR and computing its QPAI.

That means you combine all K-1s from the S corp along with all other income on the 1040 to determine your limitations.

The reg goes on to say that the S corp could calculate a shareholder's share of QPAI at the entity level, but I don’t think that is what you want to do here.

[WhiteOleander]

Thanks Bees,
Somehow I can just invision the IRS auditing all the returns that claim this new deduction/credit. I want to be sure I'm right so I can back it up.