Instructions for Form 8903

Instructions for Form 8903

Department of the Treasury

Internal Revenue Service

(Rev. December 2019)

Domestic Production Activities Deduction

Section references are to the Internal

Revenue Code unless otherwise noted.

General Instructions

share of the cooperative's DPAD to

include on Form 8903.

Future Developments

Purpose of Form

Married individuals filing a joint

income tax return figure the deduction

on one Form 8903 using the

applicable items of both spouses.

Your DPAD is generally 9% of the

smaller of:

1. Your qualified production

activities income (QPAI), or

2. Your adjusted gross income for

an individual, estate, or trust (taxable

income for all other taxpayers) figured

without the DPAD.

Note. Unless you were allocated a

share of a cooperative's DPAD or you

are a member of an expanded

affiliated group (EAG), you won't be

allowed a DPAD unless you can enter

on Form 8903 a positive amount for all

three of the following.

• Qualified production activities

income (QPAI).

• Adjusted gross income for an

individual, estate, or trust (taxable

income for all other taxpayers).

• Form W-2 wages you paid to your

employees. If you didn't pay any Form

W-2 wages (or have Form W-2 wages

allocated to you on a Schedule K-1),

you can't claim a DPAD.

For the latest information about

developments related to Form 8903

and its instructions, such as

legislation enacted after they were

published, go to IRS.gov/Form8903.

Future revisions of Form 8903.

The IRS will revise the December

2018 version of Form 8903 only when

necessary. Continue to use the 2018

version of Form 8903 for tax years

beginning after 2017 until a new

revision is issued.

What's New

Domestic production activities deduction (DPAD). DPAD under

former section 199 has been repealed

for tax years beginning after 2017.

Taxpayers using Form 8903 to

compute DPAD for tax years, or items

arising from tax years, prior to repeal

should use the Instructions for Form

8903 dated December 2018.

For specified agricultural or

horticultural cooperatives (specified

cooperatives), a deduction under

section 199A(g) for income

attributable to domestic production

activities is available for tax years

beginning after 2017. Specified

cooperatives may use Form 8903, as

applicable, to calculate the section

199A(g) deduction.

For further guidance, until final

regulations are published in the

Federal Register, taxpayers may

generally rely on the Proposed

Regulations (REG-118425-18),

published June 19, 2019, provided

the taxpayer applies the rules in their

entirety and in a consistent manner.

For purposes of the W-2 Wage

Limitation, also see Notice 2019-27,

2019-31 IRB, page 484 available at

IRS.gov/IRB/2019-31.

Dec 20, 2019

Use Form 8903 to figure your

domestic production activities

deduction (DPAD).

Reduced DPAD for oil-related

QPAI. A taxpayer with oil-related

QPAI also must reduce the DPAD by

3% of the least of the following

amounts.

• Oil-related QPAI.

• QPAI.

• Adjusted gross income for an

individual, estate, or trust (taxable

income for all other taxpayers) figured

without DPAD.

DPAD limited to wages paid. Your

DPAD generally can't be more than

50% of the Form W-2 wages you paid

to your employees that are properly

allocable to domestic production

gross receipts (including Form W-2

wages allocated to you on a

Schedule K-1).

Who Must File

DPAD for income attributable to

domestic production activities before 2018. Individuals, corporations,

cooperatives, estates, and trusts use

Form 8903 to figure their allowable

DPAD from certain trade or business

activities.

Shareholders of S corporations and

partners include information provided

by the S corporation or partnership

when figuring their allowable DPAD.

Beneficiaries of an estate or trust

include information provided by the

estate or trust when figuring their

allowable DPAD. Patrons of certain

agricultural or horticultural

cooperatives may be allocated a

Cat. No. 39878Q

For details, see the discussions of

these three items, later.

DPAD for income attributable to

domestic production activities after 2017. DPAD has been repealed

for tax years beginning after 2017.

Don’t use Form 8903 to claim DPAD

for 2018 or later years unless:

1. Your tax year began before

January 1, 2018,

2. You are a shareholder in an S

corporation or partner in a partnership

and the entity has a tax year that

began before January 1, 2018,

3. You are a beneficiary of an

estate or trust and the estate or trust

has a tax year that began before

January 1, 2018,

4. You are a patron of an

agricultural or horticultural cooperative

with a tax year that began before

January 1, 2018.

Specified cooperatives’ DPAD after 2017. For tax years beginning on

or after January 1, 2018, specified

agricultural or horticultural

cooperatives to which part I of

subchapter T applies may qualify for a

deduction under section 199A(g).

For agricultural or horticultural

cooperatives’ utilizing Form 8903 to

compute a deduction under section

199A(g), write “SPECIFIED

COOPERATIVE DPAD” across the

top of Form 8903. The Form 8903

must be attached to the cooperative’s

return.

Definitions and Special

Rules

Trade or business. QPAI and Form

W-2 wages are figured by only taking

into account items that are attributable

to the actual conduct of a trade or

business. An activity qualifies as a

trade or business if your primary

purpose for engaging in the activity is

for income or profit and you are

involved in the activity with continuity

and regularity. For example, a

sporadic activity or a hobby doesn't

qualify as a trade or business.

Coordination with other deductions. Expenses that otherwise

would be taken into account for

purposes of figuring the DPAD are

only taken into account if and to the

extent the losses and deductions from

all of your activities aren't disallowed

by a provision of the Internal Revenue

Code, including the following.

• Basis limits on a partner's share of

partnership losses.

• Basis limits on a shareholder's

share of S corporation losses.

• At-risk rules.

• Passive activity rules.

If only a portion of your losses or

deductions are allowed in the current

tax year, a proportionate share of the

losses or deductions that reflect

expenses allocated to your gross

receipts from qualified production

activities, after applying the provisions

discussed earlier, is taken into

account for purposes of figuring the

DPAD for the current tax year. If any

of the losses or deductions disallowed

for tax years beginning after 2004 are

allowed in a later tax year, a

proportionate share of the expenses

reflected in those losses or

deductions is taken into account in

figuring the DPAD in the later tax year.

A net operating loss under section

172 generally is figured without the

section 199 deduction.

S corporations and partnerships.

The DPAD is applied at the

shareholder or partner level. Certain S

corporations and partnerships can

figure QPAI and Form W-2 wages at

the entity level and allocate and report

these amounts to shareholders and

partners. See Qualified Production

Activities Income (QPAI) and Form

W-2 Wages for more information.

All other S corporations and

partnerships need to provide each

shareholder or partner with

information the shareholder or partner

needs to figure the DPAD.

Film production. S corporation

shareholders or partners that own

20% or more (directly or indirectly) of

the capital interests in the S

corporation or the partnership are

treated as having engaged directly in

any film produced by the S

corporation or partnership, and the S

corporation or partnership is treated

as having engaged directly in any film

produced by the S corporation

shareholder or partner. See section

199(d)(1)(A)(iv) for more information.

Estates and trusts. Generally, an

estate or trust will figure its:

• QPAI (which may be less than

zero), and

• Form W-2 wages it paid to its

employees (including Form W-2

wages allocated to it on a

Schedule K-1).

These items are then allocated among

the estate or trust and its beneficiaries

based on the relative proportion of the

estate's or trust's distributable net

income (DNI) for the tax year that is

distributed or required to be

distributed to the beneficiary or

retained by the estate or trust. If the

estate or trust has no DNI for the tax

year, QPAI and Form W-2 wages are

allocated entirely to the estate or trust.

Although estates and trusts actually

allocate their QPAI and Form W-2

wages to beneficiaries as discussed

earlier, when completing Form 8903

they must reduce the amounts

reported on lines 8 and 18 to reflect

the portion of those amounts that

were allocated to beneficiaries as

QPAI or Form W-2 wages. For details,

see Line 9, later.

Agricultural and horticultural cooperatives. Generally, an

agricultural or horticultural cooperative

can choose to allocate all, some, or

none of its allowable DPAD (but not

QPAI) to its patrons.

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An agricultural or horticultural

cooperative is an organization

described in section 1381 that is

engaged in:

• Manufacturing, producing, growing,

or extracting (MPGE) in whole or

significant part any agricultural or

horticultural product, or

• Marketing agricultural or

horticultural products that its patrons

have MPGE.

Agricultural or horticultural products

for this purpose include fertilizer,

diesel fuel, and other supplies used in

agricultural or horticultural production.

An organization engaged in marketing

agricultural or horticultural products is

treated as having MPGE in whole or in

significant part any qualifying

production property marketed by the

organization that its patrons have

MPGE.

Allocation of cooperative DPAD.

Qualified payments are the patronage

dividends and per-unit retain

allocations paid to patrons on which

the cooperative computed its DPAD.

A patron who receives a qualified

payment can be allocated any portion

of the DPAD allowed with respect to

the portion of the QPAI to which such

payment is attributable. The

cooperative must identify the portion

of its DPAD allocated to a patron in a

written notice mailed to the patron no

later than the 15th day of the 9th

month following the close of the

cooperative's tax year. The qualified

payments and allocated DPAD will

also be reported to patrons that aren't

corporations on Form 1099-PATR,

Taxable Distributions Received From

Cooperatives.

Note. For purposes of section 199,

patrons of agricultural or horticultural

cooperatives can't include any

distributions of qualified payments

from the cooperative in the

computation of their DPAD.

Allocation of patronage and

nonpatronage income and

deductions. Cooperatives must

calculate the DPAD separately to

determine patronage and

nonpatronage income or losses for

purposes of determining unused

patronage or nonpatronage losses on

lines 12 and 13, respectively, of

Schedule G, Form 1120-C.

If you have only patronage income

and deductions, complete the Form

Instructions for Form 8903 (Rev. 12-2019)

8903 as described in the instructions.

However, if you have both patronage

and nonpatronage income and

deductions, see Line 25 before

completing Form 8903.

Expanded affiliated groups

(EAGs). All members of an EAG are

treated as a single corporation to

figure their DPAD. The DPAD is

allocated among the members of the

group in proportion to each member's

respective amount (if any) of QPAI.

See Line 24 before completing Form

8903.

An EAG is an affiliated group as

defined in section 1504(a)

determined:

• By substituting "more than 50%" for

"at least 80%" each place it appears,

and

• Without regard to paragraphs (2)

and (4) of section 1504(b).

A corporation's status as a member

of an EAG is determined on a daily

basis. Also, if a corporation joins or

leaves an EAG, its status as a

member of the EAG is determined at

the end of the day on which it joins or

leaves the EAG.

If all the capital and profits interests

of a partnership are owned by

members of a single EAG at all times

during the partnership's tax year, the

partnership and all members of the

group are treated as a single taxpayer

to figure their domestic production

gross receipts (DPGR) for that tax

year.

Alternative minimum tax (AMT).

For taxpayers other than corporations,

the DPAD used to determine regular

tax is also used to determine

alternative minimum taxable income

(AMTI). Corporations use AMTI

(instead of taxable income) figured

without the DPAD to figure the

alternative minimum DPAD used to

determine AMTI.

For details on how corporations

figure DPAD for AMT, see the

Instructions for Form 4626.

Statistical sampling. You are

generally allowed to use statistical

sampling for purposes of calculating

the DPAD. For details about

acceptable statistical sampling

methodologies, see Rev. Proc.

2007-35 and Rev. Proc. 2011-42. You

can find Rev. Proc. 2007-35 on

page 1349 of I.R.B. 2007-23 at

IRS.gov/pub/irs-irbs/irb07-23.pdf. You

Instructions for Form 8903 (Rev. 12-2019)

can find Rev. Proc. 2011-42 on

page 318 of I.R.B. 2011-37 at

IRS.gov/pub/irs-irbs/irb11-37.pdf.

Qualified Production

Activities Income (QPAI)

Your allowable DPAD generally can't

be more than 9% of your QPAI. If you

don't have QPAI, you generally aren't

allowed a DPAD. However, you don't

need QPAI to claim a DPAD you are

allocated as a patron of an agricultural

or horticultural cooperative.

Figuring QPAI. QPAI is the excess

(if any) of:

1. Domestic production gross

receipts (DPGR), over

2. The sum of:

a. Cost of goods sold allocable to

DPGR, and

b. Other expenses, losses, or

deductions (other than the DPAD)

which are properly allocable to DPGR.

Oil-related QPAI. A taxpayer with

oil-related QPAI must reduce the

DPAD by 3% of the least of the

following amounts.

• Oil-related QPAI.

• QPAI.

• Adjusted gross income for an

individual, estate, or trust (taxable

income for all other taxpayers) figured

without the DPAD.

Oil-related QPAI is QPAI

attributable to the production, refining,

processing, transportation, or

distribution of oil or gas, or any

primary product from oil or gas (as

used in section 927(a)(2)(C) before its

repeal).

Costs related to transportation.

When figuring QPAI and oil-related

QPAI for tax years beginning after

2015, only 25% of properly allocated

costs related to the transportation of

oil are allocable to DPGR if the

taxpayer is in the trade or business of

refining crude oil and is not a major

integrated oil company (as defined in

section 167(h)(5)(B) without regard to

clause (iii)).

Primary products from oil.

Primary products from oil are oil and

all products derived from the

destructive distillation of oil, including

volatile products, light oils such as

motor fuel and kerosene, distillates

such as naphtha, lubricating oils,

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greases, and waxes, and residues

such as fuel oil.

Primary products from gas.

Primary products from gas are all gas

and associated hydrocarbon

components from gas or oil wells,

whether recovered at the lease or

upon further processing, including

natural gas; condensates; liquefied

petroleum gases such as ethane,

propane, and butane; and liquid

products such as natural gasoline.

See Temporary Regulations

section 1.927(a)-1T(g)(2) for

additional information.

S corporations and partnerships.

S corporations and partnerships that

meet specific requirements can

choose to figure QPAI at the entity

level and allocate QPAI to

shareholders or partners. The

shareholder or partner then combines

the allocated portion with QPAI from

other sources on Form 8903 to

determine the DPAD. S corporations

or partnerships that aren't eligible to

figure QPAI at the entity level must

report each shareholder's or partner's

share of deductions, expenses, or

losses on Schedule K-1 with other

information the shareholder or partner

needs to figure their DPAD.

QPAI from an estate or trust. An

estate or trust will figure its QPAI and

report each beneficiary's share on

Schedule K-1 (Form 1041).

Cooperatives. Cooperatives figure

QPAI without any deduction for

patronage dividends, per-unit retain

allocations, or nonpatronage

distributions under section 1382(b) or

(c).

Domestic Production Gross

Receipts (DPGR)

Using any reasonable method that is

satisfactory to the Secretary based on

the facts and circumstances, you

must determine whether gross

receipts qualify as DPGR on an

item-by-item basis (and not, for

example, on a division-by-division,

product line-by-product line, or

transaction-by-transaction basis);

however, see Regulations section

1.199-3(d)(2) for special rules and

Regulations section 1.199-(3)(d)(3)

for an exception. See Regulations

section 1.199-(3)(d)(4) for examples.

DPGR activities. Generally, your

gross receipts (defined later) derived

from the following activities are

DPGR.

1. Construction of real property

you perform in the United States in

your construction trade or business.

2. Engineering or architectural

services you perform in the United

States in your engineering or

architectural services trade or

business for the construction of real

property in the United States.

3. Any lease, rental, license, sale,

exchange, or other disposition of the

following.

a. Qualifying production property

you manufacture, produce, grow, or

extract in whole or in significant part in

the United States. See Qualifying

Production Property and

Manufacturing, producing, growing, or

extracting, later, for details.

b. Any qualified film you produce.

c. Electricity, natural gas, or

potable water you produce in the

United States.

In general, gross receipts derived

from the following activities aren't

DPGR.

• Activities not attributable to the

actual conduct of a trade or business.

• The sale of food and beverages you

prepare at a retail establishment.

• The lease, rental, or license of

property between certain persons

treated as a single employer.

• The lease, rental, license, sale,

exchange, or other disposition of land.

• The transmission or distribution of

electricity, natural gas, or potable

water.

• Advertising and product-placement;

however, see Regulations section

1.199-3(i)(5)(ii) for exceptions.

• Customer and technical support,

telephone and other

telecommunications services, online

services (including Internet access

services, online banking services, and

providing access to online electronic

books, newspapers, and journals),

and other similar services; however,

see Regulations section 1.199-3(i)(6)

(iii) for exceptions.

Activities in the United States.

For purposes of determining DPGR,

the United States includes the 50

states, the District of Columbia, the

territorial waters of the United States,

and the seabed and subsoil of those

submarine areas that are adjacent to

the territorial waters of the United

States and over which the United

States has exclusive rights, in

accordance with international law,

with respect to the exploration and

exploitation of natural resources. The

United States does not include

possessions and territories of the

United States or the airspace or space

over the United States and these

areas.

Activities in Puerto Rico. For

purposes of determining DPGR, the

United States includes Puerto Rico for

a taxpayer who has gross receipts

from sources within Puerto Rico that

are subject to tax under sections 1 or

11, but only for the first 12 tax years of

the taxpayer that begin after 2005 and

before 2018.

Gross receipts. Your gross receipts

are receipts that are recognized under

your method of accounting for the tax

year. Gross receipts include the

following amounts from your trade or

business activities.

• Total sales (net of returns and

allowances).

• Amounts received for services, not

including wages received as an

employee.

• Income from investments and from

incidental or outside sources

(including sales of business property).

• Amounts received that are allocable

to the payment of sales tax or other

similar state and local taxes if the tax

is legally imposed on you.

Gross receipts are generally not

reduced by the:

• Cost of goods sold, or

• Adjusted basis of property (other

than capital assets) sold or otherwise

disposed of if such property is

described in section 1221(a)(1)

through (5).

EAG partnerships. A partnership is

an EAG partnership if a single EAG

owns all the interests in the capital

and profits of the partnership at all

times during the tax year. If the

requirements are met, the EAG

partnership and all members of the

EAG are treated as a single taxpayer

for purposes of determining the

amount of domestic production gross

receipts (DPGR).

Special rules apply to the

attribution of gross receipts (a) to a

member of the EAG from the

disposition of property an EAG

partnership engaged in MPGE, and

(b) to an EAG partnership from the

disposition of property another EAG

partnership engaged in MPGE, both

of which are members of the same

EAG. See Regulations section

1.199-3(i)(8) for more information,

exceptions, and other rules.

Qualifying Production Property

The following are qualifying

production property.

• Tangible personal property.

• Computer software.

• Sound recordings.

Tangible personal property.

Tangible personal property includes

any tangible property other than land,

buildings (including structural

components), computer software,

sound recordings, qualified films,

electricity, natural gas, or potable

water. Tangible personal property

also includes any gas (other than

natural gas), chemical, and similar

property, such as steam, oxygen,

hydrogen, or nitrogen.

Machinery, printing presses,

transportation and office equipment,

refrigerators, grocery counters, testing

equipment, display racks and shelves,

and neon and other signs that are

contained in or attached to a building

constitute tangible personal property.

Allocation of gross receipts. You

generally must allocate your gross

receipts between DPGR and

non-DPGR. Allocate gross receipts

using a reasonable method that

accurately identifies gross receipts

that are DPGR. However, if less than

5% of your gross receipts are

non-DPGR, you can treat all of your

gross receipts as DPGR. Also, if less

than 5% of your gross receipts are

DPGR, you can treat all of your gross

receipts as non-DPGR.

For details, see Regulations

section 1.199-1(d).

Note. Local law doesn't control

whether property is tangible personal

property.

See Regulations section 1.199-3(j)

(2) for more information.

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Instructions for Form 8903 (Rev. 12-2019)

Computer software. In general,

computer software includes the

following.

• Any program, routine, or sequence

of machine-readable code that is

designed to cause a computer to

perform a desired function or set of

functions, and the documentation

required to describe or maintain that

program or routine. An electronic

book online or for download doesn't

constitute computer software.

• Machine-readable code for (a)

video games or similar programs, (b)

equipment that is an integral part of

other property, and (c) typewriters,

calculators, adding and accounting

machines, copiers, duplicating

equipment, and similar equipment,

even if the program isn't designed to

operate on a computer as defined in

section 168(i)(2)(B).

• Computer programs of all classes,

including operating systems,

executive systems, monitors,

compilers and translators, assembly

routines, utility programs, and

application programs.

• Any incidental and ancillary rights

that are necessary for the acquisition

of the title to, the ownership of, or the

right to use computer software, and

that are used only in connection with

that specific software. These

incidental and ancillary rights aren't

included in the definition of a

trademark or trade name under

Regulations section 1.197-2(b)(10)(i).

Exception. Computer software

doesn't include any data or

information base unless the data or

information base is in the public

domain and is incidental to a

computer program.

Example. If a word processing

program includes a dictionary feature

that may be used to spell-check a

document, then the entire program

(including the dictionary feature) is a

computer software program

regardless of the form in which the

dictionary feature is maintained or

stored.

See Regulations section 1.199-3(j)

(3) for more information.

Sound recordings. Sound

recordings include any works that

result from the fixation of a series of

musical, spoken, or other sounds. The

definition of sound recordings is

limited to the master copy of the

recordings (or other copy from which

the holder is licensed to make and

produce copies), and if the medium

(such as compact discs, tapes, or

other phonorecordings) in which the

sounds may be embodied is tangible,

Instructions for Form 8903 (Rev. 12-2019)

then the medium is considered

tangible personal property.

Exception. Sound recordings

don't include the creation of

copyrighted material in a form other

than a sound recording, such as lyrics

or music composition.

See Regulations section 1.199-3(j)

(4) for more information.

Manufacturing, producing, growing, or extracting (MPGE). MPGE

generally include the following trade

or business activities.

• Activities related to manufacturing,

producing, growing, extracting,

installing, developing, improving, and

creating qualifying production

property.

• Making qualifying production

property (QPP) out of scrap, salvage,

or junk material, or from new or raw

material by processing, manipulating,

refining, or changing the form of an

article, or by combining or assembling

two or more articles.

• Cultivating soil, raising livestock,

fishing, and mining minerals.

• Storage, handling, or other

processing activities (other than

transportation activities) in the United

States related to the sale, exchange,

or other disposition of agricultural

products, provided the products are

consumed in connection with, or

incorporated into, manufacturing,

producing, growing, or extracting

QPP, whether or not by the taxpayer.

Generally, the packaging,

repackaging, labeling, or minor

assembly of QPP does not qualify as

an MPGE activity unless you engage

in another MPGE activity with respect

to that QPP. Furthermore, the

installation of qualifying production

property does not qualify as an MPGE

activity unless you MPGE the

qualifying production property being

installed and you have the benefits

and burdens of ownership of the QPP

under federal income tax principles

during the installation period.

For details, see Regulations

section 1.199-3(e). Your MPGE of

QPP must be in whole or in significant

part within the United States. See

Regulations section 1.199-3(f) and

(g).

Qualifying in-kind partnerships.

In general, partners of qualifying

in-kind partnerships are treated as

manufacturing, producing, growing, or

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extracting the property they receive as

a distribution from the partnership. For

purposes of section 199, a qualifying

in-kind partnership is a partnership

engaged in any of the following

activities.

• The extraction, refining, or

processing of oil, natural gas (as

described in Regulations section

1.199-3(l)(2)), petrochemicals, or

products derived from oil, natural gas,

or petrochemicals, in whole or

significant part within the United

States.

• The production or generation of

electricity in the United States.

• The extraction and processing of

minerals (as defined in Regulations

section 1.611-1(d)(5)) within the

United States.

• Any other industry or activity

designated as an industry or activity of

a qualifying in-kind partnership by

publication in the Internal Revenue

Bulletin.

For more information on qualifying

in-kind partnerships, see Regulations

sections 1.199-3(i)(7). For qualifying

in-kind partnerships engaged solely in

the extraction and processing of

minerals, see Rev. Rul. 2007-30 on

page 1277 of I.R.B. 2007-21 at

IRS.gov/pub/irs-irbs/irb07-21.pdf.

Qualified Film

A qualified film is any motion picture

film, video tape, or live or delayed

television programming for which 50%

or more of the total compensation

required to produce the film is paid for

services performed by actors,

production personnel, directors, and

producers in the United States.

A qualified film includes the

copyrights, trademarks, or other

intangibles related to the film. Also, a

DPAD can be taken for the production

of a qualified film regardless of the

methods and means by which the film

is distributed.

See section 199(c)(6) and

Regulations section 1.199-3(k) for

more information. For special rules

related to S corporations,

partnerships, S corporation

shareholders, and partners

participating in the production of films,

see Film production under S

corporations and partnerships, earlier.

Cost of Goods Sold

When figuring QPAI, cost of goods

sold includes the:

• Cost of goods sold to customers,

and

• Adjusted basis of non-inventory

property you sold or otherwise

disposed of in your trade or business.

Allocation of cost of goods sold.

Generally, you must allocate your cost

of goods sold between DPGR and

non-DPGR using a reasonable

method. If you use a method to

allocate gross receipts between

DPGR and non-DPGR, the use of a

different method to allocate cost of

goods sold won't be considered

reasonable, unless it is more

accurate. However, if you qualify to

use the small business simplified

overall method, you can use it to

apportion both cost of goods sold and

other deductions, expenses, and

losses between DPGR and

non-DPGR. For more information

about this allocation method, see

Small Business Simplified Overall

Method, later.

For details about allocating cost of

goods sold, see Regulations section

1.199-4.

Other Deductions, Expenses, or

Losses

When figuring QPAI, other

deductions, expenses, or losses

include all deductions, expenses, or

losses from a trade or business other

than cost of goods sold and employee

business expenses.

Allocation and apportionment of

other deductions, expenses, or

losses. You must generally use one

of the following three methods to

allocate and apportion other trade or

business deductions, expenses, or

losses between DPGR and

non-DPGR.

• Small business simplified overall

method. (You must qualify to use this

method.)

• Simplified deduction method. (You

must qualify to use this method.)

• Section 861 method.

However, don't allocate and

apportion a net operating loss

deduction or deductions not

attributable to the conduct of a trade

or business to DPGR under any of the

methods.

S corporations and

partnerships. S corporations and

partnerships that meet specific

requirements can choose to figure

QPAI at the entity level and allocate

the QPAI to shareholders or partners.

S corporations or partnerships that

aren't eligible to figure QPAI under

those rules must report each

shareholder's or partner's share of its

deductions, expenses, or losses on

Schedule K-1 with other information

the shareholder or partner needs to

figure their DPAD.

Estates and trusts. An estate or

trust allocates directly attributable

trade or business deductions,

expenses, or losses between DPGR

and non-DPGR under Regulations

section 1.652(b)-3. An estate or trust

that is eligible must use the simplified

deduction method to allocate

indirectly attributable trade or

business deductions, expenses, or

losses between DPGR and

non-DPGR. Otherwise, the estate or

trust uses the section 861 method to

allocate these indirect items.

Small Business Simplified Overall

Method

You generally can use the small

business simplified overall method to

apportion cost of goods sold and

other deductions, expenses, and

losses between DPGR and

non-DPGR if you meet any of the

following tests.

• You are engaged in the trade or

business of farming and aren't

required to use the accrual method of

accounting (see section 447).

• Your average annual gross receipts

(defined below) are $5 million or less.

• You are eligible to use the cash

method of accounting under Rev.

Proc. 2002-28. You can find Rev.

Proc. 2002-28 on page 815 of I.R.B.

2002-18 at IRS.gov/pub/irs-irbs/

irb02-18.pdf.

Under the small business simplified

overall method, your total cost of

goods sold and other deductions,

expenses, and losses are ratably

apportioned between DPGR and

non-DPGR based on relative gross

receipts.

Example. Your total cost of goods

sold and other trade or business

deductions, expenses, or losses are

$400 and don't include a net operating

-6-

loss deduction. You have $1,000 total

gross receipts and $750 DPGR. Your

DPGR equal 75% of your total gross

receipts. Under the small business

simplified overall method, you

subtract $300 ($400 × 0.75) of your

total cost of goods sold and other

trade or business deductions,

expenses, or losses from your DPGR

to figure your QPAI, which is $450

($750 - $300).

Average annual gross receipts.

For this purpose, your average annual

gross receipts are your average

annual gross receipts for the

preceding 3 tax years. If your

business hasn't been in existence for

3 tax years, base your average on the

period it has existed. Include any

short tax years by annualizing the

short tax year's gross receipts by (a)

multiplying the gross receipts for the

short period by 12, and (b) dividing

the result by the number of months in

the short period.

Estates and trusts. Estates and

trusts can't use the small business

simplified overall method.

S corporations and partnerships.

An S corporation or partnership (other

than a qualifying in-kind partnership or

expanded affiliated group partnership)

can choose to use the small business

simplified overall method to figure

QPAI at the entity level and allocate

that QPAI to shareholders or partners

if it meets the requirements of an

eligible small pass-through entity. A

shareholder or partner who is

allocated QPAI from an eligible small

pass-through entity must report that

QPAI on line 7.

For a definition of a qualifying

in-kind partnership, see Regulations

section 1.199-3(i)(7). For a definition

of an expanded affiliated group

partnership, see Regulations section

1.199-3(i)(8).

An S corporation or partnership is

an eligible small pass-through entity if

it meets each of the following

requirements for the current tax year.

• It satisfies one of the following

requirements: (a) it has average

annual gross receipts for the 3 tax

years preceding the current tax year

of $5 million or less, (b) it is engaged

in the trade or business of farming and

isn't required to use the accrual

method of accounting, or (c) it is

eligible to use the cash method of

Instructions for Form 8903 (Rev. 12-2019)

accounting under Rev. Proc. 2002-28

(that is, it has average annual gross

receipts of $10 million or less and isn't

excluded from using the cash method

under section 448 of the Internal

Revenue Code).

• It has total cost of goods sold and

deductions (excluding the net

operating loss deduction) added

together of $5 million or less.

• It has DPGR.

• If a partnership, it doesn't have a

partner that is an ineligible partnership

(qualifying in-kind partnerships or

expanded affiliated group

partnerships).

Expanded affiliated groups. For

additional rules that apply to

expanded affiliated groups, see

Regulations section 1.199-4(f)(4).

Oil-related production activities. If

you have oil-related QPAI, and you

choose to use the small business

simplified overall method, you must

allocate part of these costs to DPGR

from oil-related production activities to

determine oil-related QPAI. See

Line 4, later.

For details about the small

business simplified overall method,

see Regulations section 1.199-4(f).

Simplified Deduction Method

You generally can use the simplified

deduction method to apportion other

deductions, expenses, and losses

(but not cost of goods sold) between

DPGR and non-DPGR if you meet

either of the following tests.

• Your total trade or business assets

at the end of your tax year are $10

million or less.

• Your average annual gross receipts

(defined above) are $100 million or

less.

Under the simplified deduction

method, your other trade or business

deductions, expenses, or losses are

ratably apportioned between DPGR

and non-DPGR based on relative

gross receipts.

Example. Your total other trade or

business deductions, expenses, or

losses are $400 and don't include a

net operating loss. You have $240 of

cost of goods sold allocable to DPGR.

You have $1,000 total gross receipts

and $600 DPGR. Your DPGR equal

60% of your total gross receipts.

Under the simplified deduction

method, you subtract $240 ($400 ×

Instructions for Form 8903 (Rev. 12-2019)

0.60) of your total other trade or

business deductions, expenses, or

losses from your DPGR to figure your

QPAI, which is $120 ($600 - $240 $240).

S corporations and partnerships.

An S corporation or partnership (other

than a qualifying in-kind partnership or

expanded affiliated group partnership)

can choose to use the simplified

deduction method to figure QPAI at

the entity level and allocate that QPAI

to shareholders or partners if it meets

the requirements of an eligible widely

held pass-through entity. A

shareholder or partner who is

allocated QPAI from an eligible widely

held pass-through entity must report

that QPAI on line 7.

For a definition of a qualifying

in-kind partnership, see Regulations

section 1.199-3(i)(7). For a definition

of an expanded affiliated group

partnership, see Regulations section

1.199-3(i)(8).

An S corporation or partnership is

an eligible widely held pass-through

entity if it meets each of the following

requirements for its current tax year.

• Either of the two tests discussed

earlier under Simplified Deduction

Method.

• It has total cost of goods sold and

deductions added together of $100

million or less.

• It has DPGR.

• On every day during the current tax

year, all of its shareholders or partners

are individuals, estates, or trusts

described (or treated as described) in

section 1361(c)(2).

• On every day during the current tax

year, no shareholder or partner owns,

alone or combined with the ownership

interests of all related persons, more

than 10% of (a) total shares of the S

corporation or (b) the profits or capital

interests in the partnership.

Estates and trusts. If eligible by

meeting one of the two tests

described earlier, an estate or trust

must use the simplified deduction

method to allocate its indirectly

attributable trade or business

deductions, expenses, or losses

between DPGR and non-DPGR. All

estates and trusts must allocate

directly attributable deductions,

expenses, or losses between DPGR

and non-DPGR under Regulations

section 1.652(b)-3.

-7-

Expanded affiliated groups. For

additional rules that apply to

expanded affiliated groups, see

Regulations section 1.199-4(e)(4).

Oil-related production activities. If

you have oil-related QPAI, and you

choose to use the simplified

deduction method, you must allocate

part of these costs to DPGR from

oil-related production activities to

determine oil-related QPAI. See

Line 3, later.

Section 861 Method

You don't have to meet any tests to

use the section 861 method. Under

the section 861 method, you generally

must apply the rules of the section

861 regulations to allocate and

apportion other trade or business

deductions, expenses, or losses

between DPGR and non-DPGR.

Section 199 is treated as an

“operative section” described in

Regulations section 1.861-8(f).

For details, see Regulations

section 1.199-4(d).

For guidance on automatic

approval to change certain elections

relating to the apportionment of

interest expense and research and

experimentation expenditures, see

Rev. Proc. 2006-42. You can find

Rev. Proc. 2006-42 on page 931 of

I.R.B. 2006-47 at IRS.gov/pub/irs-irbs/

irb06-47.pdf.

S corporations. An S corporation

can't use the section 861 method to

figure QPAI. Unless it is eligible to use

the small business simplified overall

method or simplified deduction

method, an S corporation must report

each shareholder's share of its

deductions, expenses, or losses on

Schedule K-1 (Form 1120S) that the

shareholder needs to figure their

DPAD.

Partnerships. A partnership (other

than a qualifying in-kind partnership or

expanded affiliated group partnership)

can choose to use the 861 method to

figure QPAI at the entity level and

allocate that QPAI to qualifying

partners (defined later) if it meets the

requirements of an eligible 861

partnership. A partner who is

allocated QPAI from an eligible 861

partnership must report that QPAI on

line 7.

For a definition of a qualifying

in-kind partnership, see Regulations

section 1.199-3(i)(7). For a definition

of an expanded affiliated group

partnership, see Regulations section

1.199-3(i)(8).

An eligible 861 partnership must

meet the following requirements for its

current tax year.

• It has at least 100 partners on any

day during the partnership's tax year.

• At least 70% of the partnership is

owned, at all times during its tax year,

by qualifying partners (defined next).

• It has DPGR.

Qualifying partner. A qualifying

partner is a partner that, on each day

during the partnership's tax year that

the partner owns an interest in the

partnership:

• Is not a general partner or a

managing member of a partnership

organized as a limited liability

company,

• Doesn't materially participate

(discussed later) in the activities of the

partnership,

• Doesn't hold, alone or combined

with the interests of all related

persons (defined next), 5% or more of

the profits or capital interests in the

partnership,

• Is not an ineligible entity (qualifying

in-kind partnership or expanded

affiliated group partnership).

Related persons. For purposes of

determining whether a partner is a

qualifying partner, persons are related

if they meet the requirements of

sections 267(b) or 707(b),

disregarding sections 267(e)(1) and

(f)(1)(A).

Material participation. A

qualifying partner can't materially

participate in the activities of the

partnership. See section 5.05 of Rev.

Proc. 2007-34 for the definition of

material participation.

Non-qualifying partners. An

eligible 861 partnership can't allocate

QPAI to non-qualifying partners (see

Qualifying partner, earlier). Instead,

the partnership must report each

non-qualifying partner's share of

deductions, expenses, or losses on

Schedule K-1 that the partner needs

to figure their DPAD. The partnership

items allocated to non-qualifying

partners must be excluded for

purposes of figuring QPAI at the

partnership level.

Estates and trusts. An estate or

trust that can't use the simplified

deduction method must use the

section 861 method to allocate and

apportion its indirectly attributable

trade or business deductions,

expenses, or losses between DPGR

and non-DPGR. All estates and trusts

must allocate directly attributable

deductions, expenses, or losses

between DPGR and non-DPGR under

Regulations section 1.652(b)-3.

Oil-related production activities. If

you have oil-related QPAI, apply the

rules of section 861 to determine the

amount of other trade or business

deductions, expenses, or losses to

deduct for purposes of determining

oil-related QPAI.

Adjusted Gross or Taxable

Income

Your allowable DPAD generally can't

be more than 9% of your adjusted

gross income if you are an individual,

estate, or trust (taxable income for all

other taxpayers) figured without the

DPAD. If you don't have adjusted

gross or taxable income, you

generally aren't allowed a DPAD.

Note. Although patrons without

adjusted gross or taxable income can

claim a DPAD, the DPAD can't create

or increase a net operating loss under

section 172(d). However, you don't

need taxable income to claim a DPAD

you are allocated as a member of an

Expanded Affiliated Group (EAG), and

the DPAD can create or increase a

net operating loss under Regulations

section 1.199-7(c)(2).

Agricultural and horticultural cooperatives. For this purpose, figure

taxable income without taking into

account any allowable deduction for

patronage dividends, per-unit retain

allocations, or nonpatronage

distributions.

Estates and trusts. See Line 11,

later, to figure adjusted gross income.

Unrelated business taxable income (UBTI). The allowable DPAD

of an organization taxed on its UBTI

under section 511 generally can't be

more than 9% of its UBTI figured

without the DPAD.

Form W-2 Wages

wages you paid to your employees

that are properly allocable to DPGR

(including Form W-2 wages allocated

to you on a Schedule K-1). If you

didn't pay Form W-2 wages, you

generally aren't allowed a DPAD.

However, you don't need Form W-2

wages to claim a DPAD you are

allocated as a:

• Patron of an agricultural or

horticultural cooperative, or

• Member of an expanded affiliated

group.

Note. When figuring your DPAD, the

limit equal to 50% of Form W-2 wages

is based only on Form W-2 wages

properly allocable to DPGR.

Form W-2 wages from an S corporation or partnership. S

corporations and partnerships that

meet specific requirements can

choose to figure Form W-2 wages at

the entity level and report the

allocated portion of Form W-2 wages

on Schedule K-1 to the S corporation

shareholder or partner who then

combines the allocated portion with

Form W-2 wages from other sources

on Form 8903 to determine the

DPAD.

If the S corporation or partnership

meets the requirements to be

classified as one of the eligible entities

listed below, it can figure Form W-2

wages at the entity level and allocate

Form W-2 wages to S corporation

shareholders or partners.

• Eligible small pass-through entity.

See S corporations and partnerships,

under Small Business Simplified

Overall Method, earlier, for the

requirements.

• Eligible widely held pass-through

entity. See S corporations and

partnerships, under Simplified

Deduction Method, earlier, for the

requirements.

• Eligible 861 partnership. See

Partnerships, under Section 861

Method, earlier, for the requirements.

Form W-2 wages from an estate or

trust. An estate or trust generally will

figure its Form W-2 wages and

apportion them between the

beneficiary and the fiduciary (and

among the beneficiaries) and report

each beneficiary's share on

Schedule K-1 (Form 1041).

Your allowable DPAD generally can't

be more than 50% of the Form W-2

Form W-2 wages for services performed in Puerto Rico. Taxpayers

that determine DPGR under section

-8-

Instructions for Form 8903 (Rev. 12-2019)

199(d)(8)(A), figure Form W-2 wages

by including wages paid for services

performed in Puerto Rico without

regard to section 3401(a)(8), but only

during the first 12 tax years of the

taxpayer that begin after 2005 and

before 2018.

Form W-2 wages paid to produce a

qualified film. Form W-2 wages

include compensation for services

performed in the United States by

actors, production personnel,

directors, and producers to produce a

qualified film. See Qualified Film,

earlier, for more information.

Figuring Form W-2 Wages Used

To Figure the 50% Limit

You figure Form W-2 wages used to

figure the 50% limit in two steps. First,

you must determine the amount of

wages to classify as Form W-2 wages

under Regulations section 1.199-2(e)

(1). Second, you must figure Form

W-2 wages that are properly allocable

to DPGR.

Step 1. Figuring Form W-2 Wages

You can use one of the following three

methods to figure your Form W-2

wages.

• Unmodified box method.

• Modified box 1 method.

• Tracking wages method.

After you figure Form W-2 wages,

see Step 2, later, to determine the

Form W-2 wages to report on line 16

of Form 8903.

Relevant Forms W-2. To figure your

Form W-2 wages, generally use the

sum of the amounts you properly

report for each employee on Form

W-2, Wage and Tax Statement, for

the calendar year ending with or

within your tax year. However, don't

use any amounts reported on a Form

W-2 filed with the Social Security

Administration more than 60 days

after its due date (including

extensions).

Short tax year. If you have a short

tax year, you generally will use the

sum of the amounts you properly

report for each employee on Form

W-2 for the calendar year ending with

or within that short tax year. However,

if you have a short tax year that

doesn't include a calendar year

ending within that short tax year, then

wages you properly report on Form

W-2 which you paid during the short

Instructions for Form 8903 (Rev. 12-2019)

tax year are treated as W-2 wages for

that short tax year.

Acquisition or disposition of a

trade or business. If you acquired or

disposed of a trade or business that

causes you and another employer to

pay W-2 wages to employees of the

acquired or disposed of trade or

business during the calendar year,

then the W-2 wages for the calendar

year of the acquisition or disposition

are allocated between each employer

based on the period that the

employees of the acquired or

disposed of trade or business were

employed by each employer. If you

have a short tax year that doesn’t

include a calendar year ending within

your short tax year, see Short tax

year, earlier.

Non-duplication rule. Amounts that

are treated as Form W-2 wages for a

tax year under any method can't be

treated as Form W-2 wages for any

other tax year. Also, an amount can't

be treated as Form W-2 wages by

more than one taxpayer.

Unmodified box method. Under the

unmodified box method, Form W-2

wages are the smaller of:

1. The sum of the amounts

reported in box 1 of the relevant

Forms W-2, or

2. The sum of the amounts

reported in box 5 of the relevant

Forms W-2.

Modified box 1 method. Under the

modified box 1 method, Form W-2

wages are figured as follows.

1. Add the amounts reported in

box 1 of the relevant Forms W-2.

2. Add all the amounts described

below and included in box 1 of the

relevant Forms W-2.

a. Amounts not considered wages

for federal income tax withholding

purposes.

b. Supplemental unemployment

compensation benefits.

c. Sick pay or annuity payments

from which the recipient requested

federal income tax withholding.

3. Subtract (2) from (1).

4. Add together any amounts

reported in box 12 of the relevant

Forms W-2 that are properly coded D,

E, F, G, or S.

5. Add (3) and (4).

-9-

Tracking wages method. Under the

tracking wages method, Form W-2

wages are figured as follows.

1. Add the amounts reported in

box 1 of the relevant Forms W-2 that

are also wages for federal income tax

withholding purposes.

2. Add any amounts reported in

box 1 of the relevant Forms W-2 that

are both:

a. Wages for federal income tax

withholding purposes, and

b. Supplemental unemployment

compensation benefits.

3. Subtract (2) from (1).

4. Add together any amounts

reported in box 12 of the relevant

Forms W-2 that are properly coded D,

E, F, G, or S.

5. Add (3) and (4).

Step 2. Form W-2 Wages

Allocable to DPGR

After you calculate Form W-2 wages,

as discussed in Step 1, you must

figure Form W-2 wages that are

properly allocable to DPGR. You

report the Form W-2 wages that are

properly allocable to DPGR on line 16

of Form 8903.

You can figure Form W-2 wages

that are properly allocable to DPGR

under one of the following methods.

• Small business simplified overall

method safe harbor.

• Wage expense safe harbor.

• Any other reasonable method

based on all the facts and

circumstances.

Small business simplified overall

method safe harbor. If you use the

small business simplified overall

method to allocate costs between

DPGR and non-DPGR (see Small

Business Simplified Overall Method,

earlier), you can use the small

business simplified overall method

safe harbor to determine the amount

of Form W-2 wages allocable to

DPGR. Under this safe harbor

method, the amount of Form W-2

wages that is properly allocable to

DPGR equals the proportion of DPGR

to total gross receipts.

Wage expense safe harbor. If you

are using either the section 861

method of cost allocation under

Regulations section 1.199-4(d) or the

simplified deduction method under

Regulations section 1.199-4(e), you

determine the amount of wages

properly allocable to DPGR by

multiplying the amount of wages for

the tax year by the ratio of your wage

expense included in calculating QPAI

for the tax year to your total wage

expense used in calculating your

taxable income (or adjusted gross

income) for the tax year without

regard to any wage expenses

disallowed by sections 465, 469,

704(d), or 1366(d).

If you use the section 861 method

or the simplified deduction method,

you must use the same expense

allocation and apportionment

methods that you use to determine

QPAI to allocate and apportion wage

expense for purposes of the safe

harbor.

Wage expense included in cost

of goods sold. When figuring the

ratio of your wage expense included

in calculating QPAI for the tax year to

your total wage expense used in

calculating your adjusted gross

income or taxable income (as the

case may be) for the tax year,

determine the wage expense included

in cost of goods sold using any

reasonable method based on all of the

facts and circumstances. For

example, it may be reasonable to use

(a) the amount of direct labor included

in cost of goods sold or (b) section

263A labor costs (as defined in

Regulations section 1.263A-1(h)(4)

(ii)) included in cost of goods sold.

More information. For more

information on figuring your Form W-2

wages, see Regulations section

1.199-2 and Rev. Proc. 2006-47. You

can find Rev. Proc. 2006-47 on

page 869 of I.R.B. 2006-45 at

IRS.gov/pub/irs-irbs/irb06-45.pdf.

For more information on figuring

Form W-2 wages properly allocable to

DPGR, see Regulations section

1.199-2(e)(2).

Specific Instructions

Complete lines 1 through 10,

column (a), only if you have

CAUTION oil-related production

activities. All others, do not complete

lines 1 through 9, column (a), and

enter zero on line 10a.

!

Enter amounts for all activities

(including oil-related production

activities) on lines 1 through 10,

column (b).

Line 1

Domestic Production

Gross Receipts (DPGR)

Enter your DPGR (defined earlier in

the General Instructions under

Domestic Production Gross

Receipts).

Line 2

Allocable Cost of Goods

Sold

Enter your cost of goods sold

allocable to DPGR on line 2 unless

you are using the small business

simplified overall method. If you are

using the small business simplified

overall method, skip line 2, and go to

Line 4.

For more information about

allocating costs of goods sold, see

Cost of Goods Sold, earlier, in the

General Instructions. See Small

Business Simplified Overall Method,

earlier in the General Instructions, for

more information about using this

method to allocate cost of goods sold

and other deductions or losses to

DPGR.

Line 3

Allocable Deductions and

Losses

Enter your other deductions or losses

properly allocable to DPGR on line 3

unless you are using the small

business simplified overall method. If

you are using the small business

simplified overall method, skip line 3,

and go to Line 4.

If you are using the simplified

deduction method, enter on line 3 the

other deductions or losses you ratably

apportion to DPGR. See Simplified

Deduction Method, earlier in the

General Instructions, for more

information about this method.

If you are using the section 861

method, enter on line 3 the other

deductions or losses you allocate or

apportion to DPGR. See Section 861

Method, earlier in the General

Instructions, for more information

about this method.

Oil-related production activities. If

you use the simplified deduction

method to calculate the other

deductions or losses reported on

-10-

line 3, column (b), you must make an

additional calculation to determine the

amount to report on line 3, column (a).

Multiply the amount reported on line 3,

column (b), by the ratio of oil-related

DPGR reported on line 1, column (a),

divided by DPGR from all activities

reported on line 1, column (b). Enter

the result on line 3, column (a). Don't

reduce the amount reported on line 3,

column (b), by this amount.

If you use the section 861 method,

apply the rules of section 861 to

determine the amount to report on

line 3, column (a).

Line 4

Small Business Simplified

Overall Method

Enter the amount of cost of goods

sold and other deductions or losses

you ratably apportion to DPGR using

the small business simplified overall

method.

Oil-related production activities. If

you use the small business simplified

overall method to calculate the cost of

goods sold and other deductions,

expenses, and losses reported on

line 4, column (b), you must make an

additional calculation to determine the

amount to report on line 4, column (a).

Multiply the amount reported on line 4,

column (b), by the ratio of oil-related

DPGR reported on line 1, column (a),

divided by DPGR from all activities

reported on line 1, column (b). Enter

the amount on line 4, column (a).

Don't reduce the amount reported on

line 4, column (b), by this amount.

Line 7

Beneficiaries of estates and trusts,

partners, and S corporation

shareholders report the QPAI

distributed from estates or trusts, and

certain partnerships or S corporations

on line 7. The QPAI should be

reported to you on Schedule K-1 for

Forms 1041, 1065, or 1120S. See the

related Schedule K-1 and its

instructions for more information.

Line 9

Estates and trusts must use

Regulations section 1.652(b)-3 to

allocate QPAI to beneficiaries if DNI is

distributed or required to be

distributed to beneficiaries. Report the

amount of QPAI allocated to

beneficiaries on line 9. See Estates

Instructions for Form 8903 (Rev. 12-2019)

and trusts, earlier under Definitions

and Special Rules.

Line 10a Oil-Related

Qualified Production

Activities Income

Add lines 1 through 9, column (a), to

determine oil-related QPAI. If you

don't have oil-related QPAI, don't

complete lines 1 through 9, column

(a), and enter zero on line 10a.

Line 11

Income Limitation

Individuals. Enter your adjusted

gross income from line 7 of Form

1040 figured without the DPAD.

Olympic and Paralympic medals

and USOC prize money. For

purposes of figuring your DPAD, your

adjusted gross income doesn't

include the value of any medal

awarded in, or any prize money

received from the United States

Olympic Committee on account of

competition in the Olympic Games or

Paralympic Games. If line 7 of your

Form 1040 includes these amounts,

then reduce your adjusted gross

income by them before entering it on

line 11.

Corporations. Enter your taxable

income from the applicable line of

your tax return (for example, line 30 of

Form 1120) figured without the DPAD.

Members of EAGs. See Line 24,

later.

Agricultural and horticultural cooperatives. Enter your taxable

income figured without the DPAD or

the deductions for patronage

dividends, per-unit retain allocations,

and nonpatronage distributions under

section 1382(b) or (c).

Estates and trusts. Enter your

adjusted gross income figured without

the DPAD. See the Instructions for

Form 1041 to figure adjusted gross

income. Use the method discussed

under How to figure AGI for estates

and trusts, under Line 15a–Other

Deductions.

Unrelated business taxable income (UBTI). An organization taxed

on its UBTI under section 511 enters

its UBTI from line 38 of Form 990-T

figured without the DPAD.

Instructions for Form 8903 (Rev. 12-2019)

Note. If you have extraterritorial

income (ETI), figure taxable income

without regard to any claimed ETI

exclusions.

See Regulations section 1.199-1(b)

(1) for more information.

Line 14a

If you have oil-related qualified

production income, use line 14a to

determine the least of the following

amounts.

• Oil-related QPAI—line 10a,

• QPAI—line 10b, or

• Adjusted gross income for an

individual, estate, or trust (taxable

income for all other

taxpayers)—line 11.

All others, enter zero on line 14a.

Line 14b Reduction for

Oil-Related Qualified

Production Activities

Income

If you have oil-related qualified

production income, use line 14b to

reduce your DPAD by 3% of the

amount reported on line 14a.

All others, enter zero on line 14b.

Line 16

Form W-2 Wages

Enter your Form W-2 wages that are

properly allocable to DPGR

(discussed earlier under Form W-2

Wages). Don't include Form W-2

wages you must report on line 17.

Line 17

Beneficiaries of estates and trusts,

partners, and S corporation

shareholders report the Form W-2

wages distributed from estates or

trusts, and certain partnerships or S

corporations on line 17. The Form

W-2 wages should be reported to you

on the Schedule K-1 for Forms 1041,

1065, or 1120S. See the related

Schedule K-1 and its instructions for

more information.

Line 19

Estates and trusts must use

Regulations section 1.652(b)-3 to

allocate Form W-2 wages to

beneficiaries if DNI is distributed or

required to be distributed to

beneficiaries. Report the amount of

the Form W-2 wages allocated to

beneficiaries on line 19. See Estates

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and trusts, earlier under Definitions

and Special Rules.

Line 24

Expanded Affiliated Group

Allocation

These instructions explain how

expanded affiliated groups (EAGs)

(defined earlier under Definitions and

Special Rules) figure and report the

DPAD. Certain members of an EAG

may not be required to complete the

entire Form 8903. See How To

Report, later.

Computation of the EAG's

DPAD

In general, the DPAD for an EAG is

determined by aggregating each

member's taxable income or loss,

QPAI, and Form W-2 wages. A

member's QPAI may be positive or

negative. Also, a member's taxable

income or loss and QPAI are

determined under the member's

method of accounting.

Members with different tax years.

If members of an EAG have different

tax years, in determining the DPAD of

a member, the reporting member

must take into account the taxable

income or loss, QPAI, and Form W-2

wages of each group member that are

both:

• Attributable to the period that the

member of the EAG and the reporting

member are both members of the

EAG, and

• Taken into account in a tax year

that ends with or within the tax year of

the reporting member with respect to

which the DPAD is figured.

For an example that explains the

above requirements, see Regulations

section 1.199-7.

Net operating losses. The net

operating loss (NOL) of a member of

an EAG that is used in the

computation of the EAG's taxable

income isn't treated as an NOL

carryback or carryover to determine

the taxable income limitation in a prior

or subsequent year for purposes of

section 199(a)(1)(B). See Regulations

section 1.199-7(b)(4) for more

information.

Allocation of the DPAD to

Members of the EAG

The EAG's DPAD is allocated among

members of the EAG based on the

ratio of each member's QPAI to the

total QPAI of the EAG. The allocation

is made regardless of whether the

EAG member has taxable income or

loss or Form W-2 wages for the tax

year. If a member has negative QPAI,

that member's QPAI is treated as zero

for purposes of the allocation.

method, a consolidated group

determines its QPAI by reference to

its members' DPGR, non-DPGR, cost

of goods sold, and all other

deductions, expenses, or losses,

determined on a consolidated basis.

Consolidated Groups

All members of an EAG are treated as

a single corporation for purposes of

determining the DPAD. However, the

DPAD is allocated to each member.

Under section 199, a consolidated

group is treated as a single member of

the EAG. If all members of an EAG

are members of the same

consolidated group, the DPAD of the

consolidated group is determined

based on the consolidated taxable

income or loss, QPAI, and Form W-2

wages of the group and not the

separate taxable income or loss,

QPAI, and Form W-2 wages of its

members. The consolidated group will

generally file only one Form 8903. For

details, see Regulations section

1.199-7.

If an EAG includes both

consolidated and non-consolidated

members, the consolidated (not

separate) taxable income or loss,

QPAI, and Form W-2 wages of the

consolidated group are aggregated

with the taxable income or loss, QPAI,

and Form W-2 wages of the

non-consolidated group members to

determine the DPAD. For details, see

Regulations section 1.199-7(d)(4).

A consolidated group's DPAD (or

the DPAD allocated to a consolidated

group that is a member of an EAG) is

allocated to the members of the

consolidated group in proportion to

each member's QPAI, if any,

regardless of whether the

consolidated group member has:

• Separate taxable income or loss for

the tax year, and

• Form W-2 wages for the tax year.

For purposes of allocating the

DPAD of a consolidated group among

its members, any redetermination of a

corporation's receipts, cost of goods

sold, or other deductions from an

intercompany transaction described in

Regulations section 1.1502-13(c)(1)(i)

or (c)(4) isn't taken into account, and if

a consolidated group member has

negative QPAI, the member's QPAI is

treated as zero.

Simplified deduction and small

business simplified overall methods. For purposes of applying the

simplified deduction method and the

small business simplified overall

How To Report

EAG reporting member. The EAG

chooses a reporting member from

amongst all members of the EAG with

the same tax year to figure the DPAD

for all EAG members (computing

members). The reporting member

completes lines 10a through 16 and

lines 18 through 22 of the Form 8903

for the group.

The reporting member also does

the following.

1. Enters the portion of the

deduction allocated to the other

members of the EAG (including

non-computing members) as a

negative number on line 24.

2. Completes lines 23 and 25.

3. Attaches a schedule showing

how the reporting member figured its

own QPAI.

4. Attaches a schedule that shows

how the DPAD was figured for the

group and each member's name, EIN,

and share of the DPAD.

5. Provides a copy of the group

DPAD computation schedule to the

other computing members of the

group.

EAG computing member other

than the reporting member. An

EAG computing member other than

the reporting member does the

following.

1. Completes a separate Form

8903, skips lines 1–22, and enters its

share of the group deduction on

line 24 as a positive number.

2. Completes lines 23 and 25.

3. Attaches a schedule showing

how the computing member figured its

own QPAI.

4. Attaches a copy of the group

DPAD computation schedule

provided by the reporting member.

Consolidated groups. If the EAG is

comprised of a single consolidated

group, the common parent of the

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consolidated group completes lines 1

through 25 for the group. If the EAG is

comprised of more than just the

members of a single consolidated

group, the common parent files a

Form 8903 for the consolidated group

as either the reporting member or as

an EAG member other than the

reporting member, whichever is

appropriate. In all events, the common

parent attaches a schedule that

shows the amount of the consolidated

group's DPAD allocated to each

member of the consolidated group,

and how the allocated amount was

calculated.

Line 25

Domestic Production

Activities Deduction

Combine lines 22 through 24 and

enter the result on line 25. For Form

1040 returns filed after tax year 2017,

include the result from line 25 of Form

8903 on Schedule 1 (Form 1040),

line 36. For Form 1120 returns filed

after tax year 2017, enter the result

from line 25 of Form 8903 on line 26,

Other deductions.

For tax years beginning after

December 31, 2017, additional

guidance under section 199A(g) is

pending.

Agricultural and Horticultural

Cooperatives

Reduce the amount the cooperative

deducts under section 1382 by the

portion of the cooperative's DPAD

allocated to its patrons. However, the

entire amount on line 25, which

includes any amount allocated to

patrons, is deductible under section

199 by the cooperative. See

Agricultural and horticultural

cooperatives in the General

Instructions for more information on

this subject.

How to report. Cooperatives aren't

permitted to net patronage losses with

nonpatronage income. Therefore,

they must figure taxable income from

patronage or nonpatronage activities

separately on Schedule G, Form

1120-C.

Patronage income and

deductions only. Cooperatives that

have only patronage income and

deductions generally complete Form

8903 as described earlier in the

instructions.

Instructions for Form 8903 (Rev. 12-2019)

Patronage and nonpatronage

income and deductions. For tax

years beginning before January 1,

2018, cooperatives with both

patronage and nonpatronage income

or deductions must follow the

instructions below for completing

Form 8903.

Instructions for Form 8903 (Rev. 12-2019)

Report the total amount of the

DPAD to be claimed on Form 1120-C

on line 25 of Form 8903, and leave

lines 1 through 24 blank. Attach to

Form 8903 separate calculations of

the DPAD from patronage and

nonpatronage activities, which

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conform to lines 1 through 24 of Form

8903.

Enter the DPAD from patronage

and nonpatronage sources reported

on the attachment on line 6a, column

(a), Patronage, and line 6a, column

(b), Nonpatronage, respectively, of

Schedule G, Form 1120-C.

Paperwork Reduction Act Notice. We ask for the information on this form to carry out the Internal Revenue laws of the

United States. You are required to give us the information. We need it to ensure that you are complying with these laws

and to allow us to figure and collect the right amount of tax.

You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act

unless the form displays a valid OMB control number. Books or records relating to a form or its instructions must be

retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax

returns and return information are confidential, as required by section 6103.

The time needed to complete and file this form will vary depending on individual circumstances. The estimated burden

for individual taxpayers filing this form is approved under OMB control number 1545-0074 and is included in the

estimates shown in the instructions for their individual income tax return. The estimated burden for all other taxpayers

who file this form is shown below:

Recordkeeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Learning about the law or the form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Preparing, copying, assembling, and sending the form to the IRS . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 hr., 58 min.

7 hr., 33 min.

7 hr., 58 min.

If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler,

we would be happy to hear from you. See the instructions for the tax return with which this form is filed.

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Instructions for Form 8903 (Rev. 12-2019)