Justification of Change

Implementation Plan: Open Actions for Product 8903 INST
Run by: SD_GF2LB

Run date:

18-JAN-08

Reviewer: LIGHT, CLARENCE
Action
Act
IRC
Number Section Section

Description of Action

Date
Type

Effective
Date

Target
Due Date

22-OCT-2004

28-DEC-2010

Effective
Date

Target
Due Date

22-OCT-2004

28-DEC-2007

P.L. 108-357, American Jobs Creation Act of 2004
66.00766

102(a)

Revise instructions to reflect the increase of the
transition % to 9% of the qualified production
activities income used in figuring the domestic
production activities deduction.

Reviewer: WOOLF, JR., WILLIAM
Action
Act
IRC
Number Section Section

Description of Action

Date
Type

P.L. 108-357, American Jobs Creation Act of 2004
66.00764

102(a)

Revise inst to reflect the increase to 6% of the
transition % of the qualified production activities
income used in figuring the domestic activities
production deduction.

deduction.

Reflected in General Instructions and throughout
the 2007 Instructions.

Major Changes to the 2007 Instructions for
Form 8903, Domestic Production Activities Deduction

Page 1
What’s New
We inserted text concerning new guidance under section 199 issued in 2007.
• Final regulations that provide (1) advertising and product placement income are not
DPGR, (2) gross receipts from customer and technical support, telephone and other
telecommunications services, Internet access services, online banking services, and other
services are not included in the computation of DPGR; and (3) the computation by
cooperatives of QPAI in connection with patronage dividends, per-unit retain allocations,
and non-patronage distributions. [T.D. 9317]
• Guidance clarifying that a partnership engaged in the extraction and processing of
minerals in the United States is treated as a qualifying in-kind partnership and each
partner of a qualifying in-kind partnership is treated as having manufactured, produced,
grown, or extracted (MPGE) property MPGE by the partnership. [Rev. Rul. 2007-30]
• Guidance clarifying the calculation of qualified production activities income (QPAI) by
pass-through entities on the entity level by eligible partnerships and S corporations on
behalf of their partners and shareholders, respectively. [Rev. Proc. 2007-34]
• Guidance clarifying the use of statistical sampling for purposes of the section 199
deduction. [Rev. Proc. 2007-35]
General Instructions, Purpose of the Form
We updated the instructions to reflect the 6 percent rate available for 2007 taxpayers.
Additional Guidance
We updated the guidance that is available for 2007 taxpayers.
Page 2
Coordination with other deductions
We clarified that no deduction is allowed when calculating a net operating loss (NOL)
under section 172. [IRC Sec. 172(d)(7)]

generally

S corporations and partnerships
We inserted text that clarifies that 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. [Rev. Proc. 2007-34]
Agricultural and horticultural cooperatives
Note. We have added a note stating patrons of agricultural or horticultural cooperatives
cannot include in any distributions of qualified payments from cooperatives in the
computation of the DPAD. [Reg. section 1.199-6(l)]
Page 3
Qualified Production Activities Income (QPAI)
We updated the instructions to limit the DPAD to no more than 6 percent of QPAI for
2007.
S corporations and partnerships
We revised the section to incorporate Rev. Proc. 2007-34 which clarifies that certain
eligible entities (eligible partnerships and S corporations) may calculate QPAI and Form
W-2 wages at the entity level on behalf of their partners and shareholders.
We added text to clarify that cooperatives calculate QPAI without any deduction under
section 1382(b) or (c).
Domestic Production Gross Receipts (DPGR)
We added text clarifying that receipts from advertising and product placement, 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 are not
DPGR.
Qualifying Production Property
We inserted a new section on qualifying production property which outlines in greater
detail tangible personal property, computer software, and sound recordings.
We inserted text on computer software and included an example.

Page 4
We also inserted text on sound recordings and included an exception.
Manufacturing, Producing, Growing, or Extracting
We updated the guidance since the proposed regulations cited have become final
regulations.
We inserted a section on qualifying in-kind partnerships.
We also expanded the text on EAG partnerships.
Cost of Goods Sold
We added a reference to determining the amount of W-2 wages to include in cost of
goods sold.
We also updated the guidance since the proposed regulations cited have become final
regulations.
Page 5
Other Deductions, Expenses, or Losses (cont’d)
S corporations and partnerships
We clarified that S corporations and partnerships, with a tax year beginning May 17,
2006, that meet specific requirements, can choose to figure QPAI at the entity level and
allocate the QPAI to shareholders or partners. [Rev. Proc. 2007-34]
Small Business Simplified Overall Method
Excluded Entities
We updated the guidance for excluded entities since the proposed regulations have been
finalized.
S corporations and partnerships
We added text clarifying that 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 passthrough entity. We also clarify the requirements for an eligible small pass-through entity.
[Rev. Proc. 2007-34]

Simplified Deduction Method
S corporations and partnerships
We added text clarifying that 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 widely-held
pass-through entity. We also clarify the requirements for an eligible widely-held passthrough entity. [Rev. Proc. 2007-34]
Page 6
Expanded affiliated groups
We deleted references to proposed regulations since these regulations were finalized.
Section 861 method
S corporations
We added text that clarifies that an S corporation cannot use the section 861 method to
figure QPAI. [Rev. Proc. 2007-34]
Partnerships
We also added text that clarifies that a partnership can use the section 861 method if it
meets the requirements of an eligible section 861 partnership. We added the requirements
for a section 861 partnership, including a qualifying partner. We also added language
regarding material participation, the definition of a related person, and a non-qualifying
partner. [Rev. Proc. 2007-34]
Adjusted Gross or Taxable Income
We updated the instructions to limit the DPAD to no more than 6 percent of adjusted
gross income (or taxable income) for 2007.
We added text to clarify that estates and trusts must look to the instructions for line 11 to
figure adjusted gross income.
Form W-2 wages
Note.
We clarified that DPAD is limited to 50 percent of Form W-2 wages allocable to DPGR.

Form W-2 Wages from an S corporation or partnership
We revised the text to clarify that 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 to the S
corporation shareholder or partner who then combines the allocated portion with W-2
wages from other sources on Form 8903 to determine the DPAD. We then specified the
requirements for eligible entities. [Rev. Proc. 2007-34]
Page 7
Figuring the 50% of Form W-2 Wages Limit
We added language that clarifies the steps taxpayers must take to determine the 50%
limitation for Form W-2 wages. [Temp. Reg. Section 1.199-2T(e)]
Form W-2 Wages Allocable to DPGR
We added language providing methods for taxpayers to determine Form W-2 wages
allocable to DPGR. [Temp. Reg. Section 1.199-2T(e)]
Small business simplified overall method safe harbor
We added text to clarify that a taxpayer using the small business simplified overall
method to allocate costs between DPGR and non-DPGR may use the small business
simplified overall method safe harbor to determine the amount of W-2 wages allocable to
DPGR. [Temp. Reg. Section 1.199-2T(e)]
Wage expense safe harbor
We added text to clarify how the wage expense safe harbor is to be used by a taxpayer
under either the section 861 method or the simplified deduction method to determine the
amount of wages allocable to DPGR.
Page 8
More information
We deleted guidance related to the transition rules for before and after May 17, 2006. We
added references for more information on figuring Form W-2 Wages and figuring Form
W-2 Wages properly allocable to DPGR.
Specific Instructions
Line 3

Per discussion with CC:INTL and subsequent Form 8903 changes, we inserted references
to the simplified deduction method from line 4 to line 3. We also revised the language for
clarity.
Line 7
We clarified that beneficiaries of estates and trusts, partners, and S corporation
shareholders report the QPAI distributed from estates and trusts and certain partnerships
or S corporations on line 7.
Line 9
We clarified that estates and trusts must use Reg. Section 1.652(b)-3 to allocate QPAI to
beneficiaries if DNI is distributed or required to be distributed to beneficiaries.
Line 14
We added text to specify that Form W-2 wages that are properly allocable to DPGR are
to be entered on line 14.
Line 15
We added text to clarify that 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.
Line 17
We added text to clarify that estates and trusts must use Regulations section 1.652(b)-3 to
allocate W-2 wages to beneficiaries if DNI is distributed or required to be distributed to
beneficiaries and that amount of W-2 wages allocated to beneficiaries must be reported
on line 17.
Line 22
Net operating losses
We clarified that the net operating loss of an EAG member 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.
[Temp. Reg. Section 1.199-7T(b)(4)]