Domestic Production Activities Deduction

For tax years beginning in 2007,
2008, or 2009, the percentage used
on line 13 of Form 8903 increases
from 3% to 6%. See Purpose of Form.
Userid: SD_GF2LB

PAGER/SGML
Page 1 of 10

Fileid:

DTD INSTR04

Leadpct: -1%

Pt. size: 10

...ents and Settings\GF2LB\Desktop\Form 8903\2007 I8903 010708.SGM

Instructions for Form 8903

❏

Draft

❏

Ok to Print

(Init. & date)

10:00 - 7-JAN-2008

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

You can find the final regulations in T.D. 9317 on page
957 of Internal Revenue Bulletin (I.R.B.) 2007-16 at
www.irs.gov/pub/irs-irbs/irb07-16.pdf.

2007

You can find Rev. Proc. 2007-34 on page
1345 of I.R.B. 2007-23 at www.irs.gov/pub/irsirbs/irb07-23.pdf.

You can find Rev. Proc. 2007-35
on page 1349 of I.R.B. 2007-23
at www.irs.gov/pub/irs-irbs/
irb07-23.pdf.
w

Instructions for Form 8903
Form
Domestic Production Activities Deduction
Section references are to the Internal
Revenue Code unless otherwise noted.

What’s New

Form

domestic
production
activities
deduction (DPAD)

Wages at the entity level and report
the allocated portion of QPAI and
W-2 Wages to S corporation
shareholders or partners. See these
instructions and Rev. Proc. 2007-34
for more information.
Statistical Sampling. For tax years
beginning after December 31, 2004,
you are generally allowed to use
statistical sampling for purposes of
calculating the domestic production
activities deduction (DPAD). For
details about acceptable statistical
sampling methodologies, see Rev.
Proc. 2007-35, 2007-23 I.R.B. 1349.

You can find the final regulations
issued on March 20, 2007, in T.D.
9317 on page 957 of Internal
Revenue Bulletin (I.R.B.) 2007-16 at
www.irs.gov/pub/irs-irbs/irb07-16.pdf.
You can find Rev. Rul. 2007-30 on
page 1277 of I.R.B. 2007-21 at www.
irs.gov/pub/irs-irbs/irb07–21.pdf. You
can find Rev. Proc. 2007-34 on page
1345 of I.R.B. 2007-23 at www.irs.
gov/pub/irs-irbs/irb07-23.pdf. You can
find Rev. Proc. 2007-35 on page
1317 of I.R.B. 2007-22 at www.irs.
gov/pub/irs-irbs/irb07-22.pdf.

General Instructions

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 use
information provided by the
S corporation or partnership to figure
their allowable DPAD. Beneficiaries
of an estate or trust use information
provided by the estate or trust to
figure their allowable DPAD. Patrons
of certain agricultural or horticultural
cooperatives may be allocated a
share of the cooperative’s DPAD.
However, unless you were
allocated a share of a cooperative’s
DPAD or you are a member of an
expanded affiliated group (EAG), you
will not 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 did not pay any
Form W-2 wages (or have Form W-2
wages allocated to you on a
Schedule K-1), you cannot claim a
DPAD.
For details, see the discussions of
these three items that begin on page
1.199-3
3.
Married individuals filing a joint
income tax return figure the deduction
on one Form 8903 using the
applicable items of both spouses.

Final regulations. Final regulations
under section 199, issued on March
20, 2007, in Treasury Decision 9317,
clarify the following.
• Generally, advertising and
product-placement income are not
included in domestic production gross
receipts (DPGR) for purposes of
determining qualified production
activities income (QPAI). For more
information, including exceptions to
this rule, see Regulations sections
1.199-3(i)(5)(i) and (ii).
• Generally, gross receipts derived
Purpose of Form
from customer and technical support,
Use Form 8903 to figure your DPAD.
telephone and other telecommuniYour DPAD is generally 6% of the
cation services, Internet access
smaller
of:
services, online banking services,
1. Your qualified production
and providing access to online
activities income (QPAI), or
electronic books, newspapers and
2. Your adjusted gross income for
journals, are not included in DPGR
an individual, estate, or trust (taxable
for purposes of determining QPAI.
income for all other taxpayers) figured
See Regulations section 1.199-3(i)
without the DPAD.
(6)(ii) through (v) for more
information, including exceptions to figure
However, your DPAD generally
the above rule.
cannot be more than 50% of the
• Cooperatives compute QPAI
Form W-2 wages you paid to your
without any deduction for patronage
employees (including Form W-2
dividends, per-unit retain allocations,
wages allocated to you on a
or non-patronage distributions under
Schedule K-1).
section 1382(b) or (c). See
Regulations section 1.199-6(c) for
Additional Guidance
more information.
These instructions cover DPAD rules
These regulations apply to tax
years beginning on or after March 20, from Internal Revenue Code section
199. They also cover a few rules
2007; however, you can choose to
addressing common situations from
apply them to all tax years beginning
additional guidance. For more
after December 31, 2004.
information on the DPAD rules,
Qualifying in-kind partnerships. A
generally see Regulations sections
partnership engaged solely in the
extraction and processing of minerals 1.199-1 through 1.199-9 as well as
within the United States is considered Temporary Regulations sections
1.199-2T, 1.199-3T, 1.199-5T,
a qualifying in-kind partnership under
1.199-7T, and 1.199-8T.
section 199. See Rev. Rul. 2007-30.
For guidance on figuring Form W-2
For additional information on
wages, see Form W-2 Wages on
qualifying in-kind partnerships, see
page 6.
page 4.
New rules for certain S
For recent guidance on computer
corporations and partnerships. S
software and computer-related
corporations and partnerships that
services, see Regulations sections
meet certain requirements can
1.199-5 and 1.199-6 in Treasury
choose to figure QPAI and W-2
Decision 9317.

, with tax years beginning
after May 17, 2006,

Department of the Treasury
Internal Revenue Service

Who Must File

39878Q
You canCat.
findNo.Rev.
Rul. 2007-30 on page 1277 of I.R.B.
2007-21 at www.irs.gov/pub/irs-irbs/irb07-21.pdf.

Page 2 of 10

Instructions for Form 8903

10:00 - 7-JAN-2008

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Form

Definitions and Special
Rules

shareholder or partner with
information the shareholder or partner
needs to figure the DPAD.

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 does not
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
are not disallowed by any of the
following provisions.
• 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.
• Any other provision of the Internal
Revenue Code.
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 listed above, 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 is figured without the section 199
deduction.
S corporations and partnerships.
The DPAD is applied at the
shareholder or partner level. For tax
years beginning after May 17, 2006,
certain S corporations and
partnerships can figure QPAI and
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

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.

C

Although estates and trusts
actually allocate their QPAI and Form
W-2 wages to beneficiaries as
discussed above, when completing
Form 8903 they must reduce the
amounts reported on lines 8 and 16
to reflect the portion of those amounts
that were allocated to beneficiaries as
QPAI or Form W-2 wages. For
details, see Specific Instructions on
page 8.
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.
For this purpose, an agricultural or
horticultural cooperative is an
organization described in section
1381 that is engaged in the:
• Manufacturing, production, growth,
or extraction (MPGE) in whole or
significant part of any agricultural or
horticultural product, or
• Marketing of agricultural or ing
horticultural products.
An organization engaged in
marketing agricultural or horticultural
products is treated as having MPGE
in whole or significant part any
qualifying production property
marketed by the organization that its
patrons have MPGE. For this
purpose, agricultural or horticultural
products include fertilizer, diesel fuel,
and other supplies used in
agricultural or horticultural production.
Allocation of cooperative DPAD.
A patron who receives a patronage
dividend or qualified per-unit retain
certificate can be allocated any
portion of the DPAD allowed with
-2-

engaged in

generally Style Guide p. 8

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
allocated DPAD will also be reported
to patrons that are not corporations
on Form 1099-PATR, Taxable
Distributions Received From
Cooperatives.
Note. Patrons of agricultural or
horticultural cooperatives cannot
include any distributions of qualified
payments from the cooperative in the
computation of their DPAD.
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 the instructions for line 22 before
completing Form 8903.
An EAG is an affiliated group as
defined in section 1504(a)
determined:
• By substituting ‘‘more than 50
percent’’ for ‘‘at least 80 percent’’
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, see the Instructions for
Form 4626, Alternative Minimum
Tax—Corporations.
Instructions for Form 8903

Page 3 of 10

Instructions for Form 8903

10:00 - 7-JAN-2008

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

for patronage
dividends, per-unit
retain allocations,
or non-patronage
distributions

Qualified Production
Activities Income (QPAI)
Your allowable DPAD generally
cannot be more than 6% of your
QPAI. If you do not have QPAI, you
generally are not allowed a DPAD.
However, you do not need QPAI to
claim a DPAD you are allocated as a
patron of an agricultural or
horticultural cooperative.
S corporations and partnerships.
S corporations and partnerships, with
tax years beginning after May 17,
2006, 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 are
not 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).
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)
allocable to DPGR.
figure
19
Cooperatives. For tax years
beginning on or after March 20, 2007,
cooperatives calculate QPAI without
any deduction under section 1382(b)
or (c). However, you can choose to
apply this rule to tax years beginning
after December 31, 2004.

Domestic Production Gross
Receipts (DPGR)
Generally, your gross receipts
(defined below) 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.
Instructions for Form 8903

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, below 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 are not
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,
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.
Gross receipts. 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 incidental or outside
sources (including sales of business
property).
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).
Allocation of gross receipts. You
generally must allocate your gross
receipts between DPGR and
non-DPGR. Allocate gross receipts
using a reasonable method that
-3-

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, under
the final regulations, 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).

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.
Note. Local law does not control
whether property is tangible personal
property.
See Regulation section
1.199-3(j)(2) for more information.
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 or
functions, and the documentation
required to describe or maintain that
program or routine. An electronic
book online or for download does not
constitute computer software.
• Machine-readable code for (1)
video games or similar programs, (2)
equipment that is an integral part of
other property, and (3) typewriters,
calculators, adding and accounting
machines, copiers, duplicating
equipment, and similar equipment,
even if the program is not designed to
operate on a computer as defined in
section 168(i)(2)(B).
• Computer programs including, but
not limited to, operating systems,

a, b, c

of

Page 4 of 10

Instructions for Form 8903

10:00 - 7-JAN-2008

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

engaged in MPGE

program
"noninventory"
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 are not
included in the definition of a
trademark or trade name under
Regulation section 1.197-2(b)(10)(i).
Exception. Computer software
does not 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 regardless of the
form in which the dictionary feature is
maintained or stored.
See Regulation 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,
then the medium is considered
tangible personal property.
Exception. Sound recordings do
not include the creation of copyrighted material in a form other than a
sound recording, such as lyrics or
music composition.
See Regulation section
1.199-3(j)(4) for more information.

Manufacturing, Producing,
Growing, or Extracting
Manufacturing, producing, growing,
and extracting (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 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
qualifying production property
whether or not by the taxpayer.
For details, see Regulations
section 1.199-3(e).
Qualifying in-kind partnerships. In
general, partners of qualifying in-kind
partnerships are treated as having
MPGE 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
defined 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
section 1.199-9(i), and Temporary
Regulations section 1.199-3T(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 www.irs.gov/pub/irs-irbs/
irb07-21.pdf.
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 section 199(c)(4).
Special rules apply to the
attribution of gross receipts (1) to a
member of the EAG from the
disposition of property MPGE by an
-4-

a

b
EAG partnership, and (2) to an EAG
partnership from the disposition of
property MPGE by another EAG
partnership, both of which are
members of the same EAG. See
Regulations section 1.199-3T(i)(8) for
more information, exceptions, and
other rules.

Cost of Goods Sold
For purposes of the DPAD, cost of
goods sold includes the:
• Cost of goods sold to customers,
and
• Adjusted basis of other 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 will not be considered
reasonable, unless it is more
accurate. However, if you qualify to
use the small business simplified
overall method (discussed on page
5), you can use it to apportion both
cost of goods sold and other
deductions, expenses, and losses
between DPGR and non-DPGR.
For details, see Regulations
section 1.199-4.
W-2 Wages. To determine the
amount of W-2 wages to include in
cost of goods sold, see Wage
expense included in cost of goods
sold, on page 7.

Other Deductions, Expenses,
or Losses
Other deductions, expenses, or
losses include all deductions,
expenses, or losses (other than cost
of goods sold and employee business
expenses) from a trade or business.
Allocation and apportionment of
other deductions, expenses, or
losses. You can 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.
• Simplified deduction method.
• Section 861 method.
However, do not 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.
Instructions for Form 8903

Page 5 of 10

Instructions for Form 8903

10:00 - 7-JAN-2008

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

", which is
$450 ($750 minus
$300)."

S corporations and
partnerships. S corporations and
partnerships, with a tax year
beginning after May 17, 2006, 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 are
not 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 allocable 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 allocable 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 are not
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 www.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 do not include a
net operating loss deduction. You
have $1,000 total gross receipts and
$750 DPGR. Your DPGR equal 75%
of your total gross receipts. Under the
Instructions for Form 8903

You have $240 of
cost of goods sold
allocable to DPGR.
small business simplified overall
method, you subtract $300 ($400 ×
.75) of your total cost of goods sold
and other trade or business
deductions, expenses, or losses from
your DPGR to figure your QPAI.
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 has not 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.
Excluded entities. Estates and
trusts cannot use the small business
simplified overall method. Also,
certain oil and gas partnerships and
certain partnerships owned by
expanded affiliated groups cannot
use the small business simplified
overall method.
For details, see Regulations
section 1.199-4(f).
S corporations and partnerships.
An S corporation or 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. 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.
• Satisfies one of the following
requirements: (a) it has average
annual gross receipts for the three tax
years preceding the current tax year
of $5 million or less, (b) it is engaged
in the trade or business of farming
and is not required to use the accrual
method of accounting, or (3) it is
eligible to use the cash method of
accounting under Rev. Proc.
2002-28, 2002-1 C.B. 815 (that is, it
has average annual gross receipts of
$10 million or less and is not
excluded from using the cash method
under Section 448 of the Internal
Revenue Code).
• It has total cost of goods sold and
deductions added together of $5
million or less.
• It has DPGR.
• If a partnership, it does not have a
partner that is an ineligible

"It satisfies"

-5-

"(c)"

partnership (qualifying in-kind
partnerships or expanded affiliated
group partnerships as defined in
Temporary Regulations section
1.199-3T(i)(7) and (8)).
Expanded affiliated groups. For
additional rules that apply to
expanded affiliated groups, see
Regulations section 1.199-4(f)(4).

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 do not include a
net operating loss. 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 × .60) of your total other trade
or business deductions, expenses, or
losses from your DPGR to figure your
QPAI.
S corporations and partnerships.
An S corporation or 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. 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

",which is $120 ($600
minus $240 minus $240)."

Page 6 of 10

Instructions for Form 8903

10:00 - 7-JAN-2008

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

"b"

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 (2) the profits or capital
interests in the partnership.
Estates and trusts. If eligible under
the above rules, an estate or trust
must use the simplified deduction
method to allocate its indirectly
allocable trade or business
deductions, expenses, or losses
between DPGR and non-DPGR. All
estates and trusts must allocate
directly allocable deductions,
expenses, or losses between DPGR
and non-DPGR under Regulations
section 1.652(b)-3.
Expanded affiliated groups. For
additional rules that apply to
expanded affiliated groups, see
Regulations section 1.199-4(e).

Section 861 Method
You do not 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 www.irs.gov/pub/
irs-irbs/irb06-47.pdf .
S corporations. An S corporation
cannot 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 that the shareholder
needs to figure their DPAD.
Partnerships. A partnership can
choose to use the 861 method to
figure QPAI at the entity level and
allocate that QPAI to qualifying
partners (defined below) 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. 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,
• Does not materially participate
(discussed later) in the activities of
the partnership,
• Does not own, 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 partnership
(qualifying in-kind partnership or
expanded affiliated group partnership
as defined in Temporary Regulations
section 1.199-3T(i)(7) and (8)).
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 cannot 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 cannot
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 computing
QPAI at the partnership level.
Estates and trusts. An estate or
trust that cannot use the simplified
deduction method must use the
section 861 method to allocate and
apportion its indirectly allocable trade
or business deductions, expenses, or
losses between DPGR and
non-DPGR. All estates and trusts
must allocate directly allocable
deductions, expenses, or losses
-6-

Form

between DPGR and non-DPGR
under Regulations section 1.652(b)-3.

Adjusted Gross or
Taxable Income
Your allowable DPAD generally
cannot be more than 6% 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 do not have
adjusted gross or taxable income,
you generally are not allowed a
DPAD. However, you do not need
adjusted gross or taxable income to
claim a DPAD you are allocated as a:
• Patron of an agricultural or
horticultural cooperative, or
• Member of an expanded affiliated
group.
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 the
instructions for line 11 on page 8 to
figure adjusted gross income.
Unrelated business taxable income
(UBTI). The allowable DPAD of an
organization taxed on its UBTI under
section 511 generally cannot be more
than 6% of its UBTI figured without
the DPAD.

Form W-2 Wages
Your allowable DPAD generally
cannot be more than 50% of the
Form W-2 wages you paid to your
employees (including Form W-2
wages allocated to you on a
Schedule K-1). If you did not pay
Form W-2 wages, you generally are
not allowed a DPAD. However, you
do not 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, with
tax years beginning after May 17,
2006, that meet specific
requirements, can choose to figure
Form W-2 wages at the entity level
and report the allocated portion of
W-2 wages on Schedule K-1 to the S
corporation shareholder or partner
Instructions for Form 8903

Page 7 of 10

Instructions for Form 8903

10:00 - 7-JAN-2008

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Form
who then combines the allocated
portion with 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, on page 5 for the
requirements.
• Eligible widely-held pass-through
entity. See S corporations and
partnerships, under Simplified
Deduction Method, on page 5 for the
requirements.
• Eligible 861 partnership. See
Partnerships, under Section 861
Method, on page 6 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).

Figuring the 50% of Form
W-2 Wages Limit
You figure the 50% of Form W-2
Wages 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).
See Figuring Form W-2 Wages,
below. Second, you must figure Form
W-2 Wages that are properly
allocable to DPGR.
You can figure Form W-2 wages
that are properly allocable to DPGR
using one of the safe harbor methods
discussed later under Form W-2
Wages Allocable to DPGR. Also, you
can use any reasonable method
based on all the facts and
circumstances.

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 Form W-2 Wages Allocable to
DPGR to determine the 50% of Form
W-2 wages limit to report on line 14 of
Form 8903.
Relevant Forms W-2. To figure
your Form W-2 wages, generally use
Instructions for Form 8903

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, do not
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).
Non-duplication rule. Amounts that
are treated as Form W-2 wages for a
tax year under any method cannot be
treated as Form W-2 wages for any
other tax year. Also, an amount
cannot 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.
Form
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.
"s"
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 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).
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 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).
-7-

Form W-2 Wages Allocable to
DPGR
After you calculate Form W-2 Wages,
as discussed above, 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 14 of Form
8903 as the 50% of Form W-2 wages
limit.
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
on page 5), you can use the small
business simplified overall method
safe harbor to determine the amount
of W-2 wages allocable to DPGR.
Under this safe harbor method, the
amount of 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 Reg.
Section 1.199-4(d) or the simplified
deduction method under Regulation
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. After you determine
the amount of wages under the wage
expense safe harbor, discussed
earlier, you can allocate a portion of
those wages to cost of goods sold by
any reasonable method based on the
facts and circumstances. For

"ulations"

Page 8 of 10

Instructions for Form 8903

10:00 - 7-JAN-2008

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

You can find Rev. Proc. 2006-47 on
page 851 of I.R.B. 2006-45 at www.
irs.gov/pub/irs-irbs/irb06-45.pdf.
b

a
Form

example, you can include wage
expense in cost of goods sold in
proportion to (1) the amount of direct
labor included in cost of goods sold,
or (2) section 263A labor costs (as
defined in Regulations section
1.263A-1(h) (4)(ii)) included in cost of
goods sold. See Temporary
Regulations section
1.199-2T(e)(2)(ii)(B) for more
information.
More information. For more
information on figuring your Form
W-2 wages, see Regulations section
1.199-2 and Rev. Proc. 2006-47.
For more information on figuring
Form W-2 wages properly allocable
to DPGR, see Temporary
Regulations section 1.199-2T(e)(2).

Specific Instructions
Line 1
Domestic Production
Gross Receipts (DPGR)
Enter your DPGR (defined on page
3).

"allocable to
DPGR"

Line 2
Allocable Cost of Goods
Sold
If you are not using the small
business simplified overall method,
enter your allocable cost of goods
sold (discussed on page 4).

Line 3
If you are using the simplified
deduction method (discussed on
page 5) or the section 861 method
(discussed on page 6), enter the
other deductions or losses you
ratably apportion to DPGR.

Line 4
If you are using the small business
simplified overall method (discussed
on page 5), enter the amount of cost
of goods sold and other deductions or
losses you ratably apportion to
DPGR.

"required"

Line 9

Line 17

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
and trusts on page 2.

Estates and trusts must use
Regulations section 1.652(b)-3 to
allocate W-2 wages to beneficiaries if
DNI is distributed or rquired to be
distributed to beneficiaries. Report
the amount of the W-2 wages
allocated to beneficiaries on line 17.
See Estates and trusts on page 2.

Line 11
Income Limitation
Individuals. Enter your adjusted
gross income from line 37 of Form
1040 figured without the DPAD.
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 the
instructions for line 22 for exceptions.
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 15b—
Allowable Miscellaneous Itemized
Deductions Subject to the 2% Floor.
Unrelated business taxable income
(UBTI). An organization taxed on its
UBTI under section 511 enters its
UBTI from line 34 of Form 990-T
figured without the DPAD.

Line 14
Form W-2 Wages
Enter your Form W-2 wages that are
properly allocable to DPGR
(discussed on page 7). Do not include
Form W-2 wages you must report on
line 15.

Form

Line 7

Line 15

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.

Beneficiaries of estates and trusts,
partners, and S corporation
shareholders report the W-2 wages
distributed from estates or trusts, and
certain partnerships or S corporations
on line 15. The 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.
-8-

"is not treated as an"

Line 22
Expanded Affiliated
Group Allocation
The instructions below explain how
expanded affiliated groups (EAGs)
(defined on page 2) figure and report
the DPAD. Certain members of an
expanded affiliated group may not be
required to complete the entire Form
8903. See How to Report below.

T
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 begins after 2004 and 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 cannot also be used as a
NOL carryback or carryover to
determine the taxable income of that
member in a prior or subsequent year
for purposes of section 199(a)(1)(B).
See Regulations section
1.199-7T(b)(4) for more information.
Instructions for Form 8903

"limitation"

Page 9 of 10

Instructions for Form 8903

10:00 - 7-JAN-2008

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

"computing"

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.
Section 199 closing of the books
method. Under the section 199
closing of the books method, a
corporation’s taxable income or loss,
QPAI, and Form W-2 wages for the
period during which the corporation
was a member of the EAG are figured
by treating the corporation’s tax year
as two separate tax years. The first
tax year is treated as ending on the
close of the day on which the
corporation’s status as a member of
the EAG changes. The second tax
year is treated as beginning on the
day after the corporation’s status as a
member of the EAG changes.
Making the section 199 closing of
the books election. A corporation
makes the section 199 closing of the
books election by attaching the
following statement to the
corporation’s timely filed (including
extensions) federal income tax return
for the tax year that includes the
periods that are subject to the
election: ‘‘The section 199 closing of
the books election is hereby made
with respect to [insert name of
corporation and its employer
identification number] with respect to
the following periods [insert dates of
two periods between which items are
allocated pursuant to the closing of
the books method].’’
If you filed your original return on
time without making the election, you
can make the election on an
amended return filed no later than 6
months after the due date of your tax
return (excluding extensions). Enter
“Filed pursuant to section
301.9100-2” at the top of the
amended return.
Once made, the election is
irrevocable.

Consolidated Groups
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
Instructions for Form 8903

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, 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
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.

How to Report T
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.
EAG reporting member. The EAG
chooses a reporting member from
amongst all members of the EAG to
figure the DPAD for all EAG members
with the same tax year. The reporting
member completes lines 10 through
14 and lines 16 through 20 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 as a negative
number on line 22.
-9"(including noncomputing members)"

2. Completes lines 21 and 23.
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 members of the group.
EAG member other than the
reporting member. An EAG
member other than the reporting
member does the following.
1. Completes a separate Form
8903, skips lines 1-20, and enters its
share of the group deduction on line
22 as a positive number.
2. Completes lines 21 and 23.
3. Attaches a schedule that shows
how its QPAI was figured.
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
consolidated group completes lines 1
through 23 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.
"(computing
members)."

Line 23
Domestic Production
Activities Deduction

Combine lines 20 through 22 and
enter the result on line 23 and the
appropriate line of your tax return.
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 23, which includes any
amount allocated to patrons, is
deductible under section 199 by the
cooperative. See Agricultural and
horticultural cooperatives on page 2
for more information on this subject.
"with the same tax
year"

Page 10 of 10

Instructions for Form 8903

10:00 - 7-JAN-2008

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

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., 1 min.
13 hr., 6 min.
13 hr., 46 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.

-10-

Instructions for Form 8903