IRS Memorandum Outlines Eligibility Of ‘Cloud’ Computing For Section 199 Deduction

The IRS has released an internal legal memorandum (ILM 2012-26-015) outlining how it approaches questions regarding whether receipts for licensing or selling "cloud"-based software qualify as domestic production gross receipts (DPGRs) for purposes of the Section 199 domestic production activities deduction (DPAD).

Receipts attributable to the license or other disposition of computer software are considered DPGRs for purposes of DPAD only if certain conditions are met. Generally, software must be affixed to a physical medium such as a CD or available for download to a customer's computer in order for the revenues from its disposition to qualify as a DPGR. Payments received for customers using software that exists only on a server and is accessible through the cloud is generally ineligible to qualify as DPGRs. If, however, the taxpayer or another person derives, on a regular, ongoing basis, gross receipts from the licensing or disposition of substantially identical