(1) Application of section to pass-thru entities
(A) Partnerships and S corporations In the case of a partnership or S corporation
(i) this section shall be applied at the partner or shareholder level,
(ii) each partner or shareholder shall take into account such persons allocable share of each item described in subparagraph (A) or (B) of subsection (c)(1) (determined without regard to whether the items described in such subparagraph (A) exceed the items described in such subparagraph (B)), and
(iii) each partner or shareholder shall be treated for purposes of subsection (b) as having W-2 wages for the taxable year in an amount equal to such persons allocable share of the W-2 wages of the partnership or S corporation for the taxable year (as determined under regulations prescribed by the Secretary).
(B) Trusts and estates In the case of a trust or estate
(i) the items referred to in subparagraph (A)(ii) (as determined therein) and the W2 wages of the trust or estate for the taxable year, shall be apportioned between the beneficiaries and the fiduciary (and among the beneficiaries) under regulations prescribed by the Secretary, and
(ii) for purposes of paragraph (2), adjusted gross income of the trust or estate shall be determined as provided in section
67 (e) with the adjustments described in such paragraph.
(C) Regulations
The Secretary may prescribe rules requiring or restricting the allocation of items and wages under this paragraph and may prescribe such reporting requirements as the Secretary determines appropriate.
(2) Application to individuals In the case of an individual, subsection (a)(1)(B) shall be applied by substituting adjusted gross income for taxable income. For purposes of the preceding sentence, adjusted gross income shall be determined
(B) without regard to this section.
(3) Agricultural and horticultural cooperatives
(A) Deduction allowed to patrons Any person who receives a qualified payment from a specified agricultural or horticultural cooperative shall be allowed for the taxable year in which such payment is received a deduction under subsection (a) equal to the portion of the deduction allowed under subsection (a) to such cooperative which is
(i) allowed with respect to the portion of the qualified production activities income to which such payment is attributable, and
(ii) identified by such cooperative in a written notice mailed to such person during the payment period described in section
1382 (d).
(B) Cooperative denied deduction for portion of qualified payments The taxable income of a specified agricultural or horticultural cooperative shall not be reduced under section
1382 by reason of that portion of any qualified payment as does not exceed the deduction allowable under subparagraph (A) with respect to such payment.
(C) Taxable income of cooperatives determined without regard to certain deductions
For purposes of this section, the taxable income of a specified agricultural or horticultural cooperative shall be computed without regard to any deduction allowable under subsection (b) or (c) of section 1382 (relating to patronage dividends, per-unit retain allocations, and nonpatronage distributions).
(D) Special rule for marketing cooperatives
For purposes of this section, a specified agricultural or horticultural cooperative described in subparagraph (F)(ii) shall be treated as having manufactured, produced, grown, or extracted in whole or significant part any qualifying production property marketed by the organization which its patrons have so manufactured, produced, grown, or extracted.
(E) Qualified payment For purposes of this paragraph, the term qualified payment means, with respect to any person, any amount which
(i) is described in paragraph (1) or (3) of section
1385 (a),
(ii) is received by such person from a specified agricultural or horticultural cooperative, and
(iii) is attributable to qualified production activities income with respect to which a deduction is allowed to such cooperative under subsection (a).
(F) Specified agricultural or horticultural cooperative For purposes of this paragraph, the term specified agricultural or horticultural cooperative means an organization to which part I of subchapter T applies which is engaged
(i) in the manufacturing, production, growth, or extraction in whole or significant part of any agricultural or horticultural product, or
(ii) in the marketing of agricultural or horticultural products.
(4) Special rule for affiliated groups
(A) In general
All members of an expanded affiliated group shall be treated as a single corporation for purposes of this section.
(B) Expanded affiliated group For purposes of this section, the term expanded affiliated group means an affiliated group as defined in section
1504 (a), determined
(i) by substituting more than 50 percent for at least 80 percent each place it appears, and
(ii) without regard to paragraphs (2) and (4) of section
1504 (b).
(C) Allocation of deduction
Except as provided in regulations, the deduction under subsection (a) shall be allocated among the members of the expanded affiliated group in proportion to each members respective amount (if any) of qualified production activities income.
(6) Coordination with minimum tax For purposes of determining alternative minimum taxable income under section
55
(A) qualified production activities income shall be determined without regard to any adjustments under sections
56 through
59, and
(B) in the case of a corporation, subsection (a)(1)(B) shall be applied by substituting alternative minimum taxable income for taxable income.
(7) Unrelated business taxable income For purposes of determining the tax imposed by section
511, subsection (a)(1)(B) shall be applied by substituting unrelated business taxable income for taxable income.
(8) Treatment of activities in Puerto Rico
(A) In general In the case of any taxpayer with gross receipts for any taxable year from sources within the Commonwealth of Puerto Rico, if all of such receipts are taxable under section
1 or
11 for such taxable year, then for purposes of determining the domestic production gross receipts of such taxpayer for such taxable year under subsection (c)(4), the term United States shall include the Commonwealth of Puerto Rico.
(B) Special rule for applying wage limitation In the case of any taxpayer described in subparagraph (A), for purposes of applying the limitation under subsection (b) for any taxable year, the determination of W2 wages of such taxpayer shall be made without regard to any exclusion under section
3401 (a)(8) for remuneration paid for services performed in Puerto Rico.
(C) Termination
This paragraph shall apply only with respect to the first 2 taxable years of the taxpayer beginning after December 31, 2005, and before January 1, 2008.