U.S. Individual Income Tax Return

2006 Instructions for Form 8903
Purpose: This is the first circulated draft of the 2006 Instructions for Form 8903 for your
review and comments. See below for a discussion of the major changes.
TPCC Meeting: None, but one may be arranged if requested.
Prior Version: The 2005 Instructions for Form 8903 are available at:
http://www.irs.gov/pub/irs-pdf/i8903.pdf
Form: The 2006 Form 8903 was circulated earlier at:
http://taxforms.web.irs.gov/Products/Drafts/2006/06f8903_d1.pdf
Other Products: Circulations of draft tax forms, instructions, notices, and publications are
posted at:
http://taxforms.web.irs.gov/draft_products.html
Comments: Please email, fax, call, or mail any comments by December 15, 2005.
Clarence Light
Tax Forms and Publications
SE:W:CAR:MP:T:B:C
Email: [email protected]
Phone: 202-283-0130
Fax: 202-283-4545
Major Changes to the 2006 Form 8903 Instructions
Note: We added references throughout the instructions to (1) the final regulations issued on June
1, 2006, and (2) the new Additional Guidance section discussed below.
Page 1
We added What’s New to highlight the following changes:
• Final regulations were issued on June 1, 2006.
• An explanation of the new requirements included in section 514 of the Tax Increase Prevention
and Reconciliation Act of 2005 (TIPRA) effective for tax years beginning after May 17, 2006:
o Only wages that are allocable to domestic production are included in the Form W-2 wage
limitation.
o The rules for determining Form W-2 wages of partners and S corporation shareholders are
simplified by determining wages solely at the entity level.
• Under the final regulations, the simplified deduction method is allowed if average gross receipts
are $100 million (up from $25 million) or less.
We added Additional Guidance to discuss the final regulations and some optional sources of
additional guidance.
Page 3
Under Other Deductions, Expenses, or Losses we added a clarification that employee business
expenses are excluded from other deductions, expenses, or losses.
Page 4

Under Simplified Deduction Method we note that the final regulations increased the average
annual gross receipts threshold amount to $100 million from $25 million.
Under Section 861 Method we added a reference to Rev. Proc. 2006-42 which provides guidance
on automatic approval to change certain elections relating to the apportionment of interest expense
and research and experimentation expenditures.
Page 5
At the top of the 1st column, we changed the heading Cooperatives to Agricultural and
horticultural cooperatives to clarify that the provision only applies to these types of cooperatives.
Under Form W-2 Wages, we made the following changes:
• Per IRC 199(b)(2)(C) and Treasury Decision 9293, we notify taxpayers with a tax year beginning
after May 17, 2006, that only wages that are directly allocable to domestic production can be
included in wages for purposes of determining the 50% of Form W-2 wages limitation.
• We notify partnerships, S corporations, and estates or trusts, that, for tax years beginning after
May 17, 2006, they are no longer required to calculate the 6% of QPAI limit on allocable wages.
Under More information, we added references for Rev. Proc. 2006-22 and Rev. Proc. 2006-47.
Page 6
Under Line 2 we revised the instructions to conform to the changes made to line 2 of the Form
8903.
Under Line 3 we revised the instructions to conform to the changes made to line 3 of the Form
8903.
Under Line 4 we revised the instructions to conform to the changes made to line 4 of the Form
8903.
Under Line 9, Income Limitation, we made the following changes:
• Under Corporations, we reference Line 30 of the Form 1120 for taxable income used in the
calculation of the DPAD.
• We changed the heading Cooperatives to Agricultural and horticultural cooperatives to
clarify that the provision only applies to these types of cooperatives.
Page 7
Per the suggestion of Modernized efile, at the top of the 1st column we clarify that a consolidated
group generally will only file one Form 8903.
Also, per the suggestion of Modernized efile, under EAG reporting member under How to Report
we clarify that the EAG chooses the reporting member for the EAG amongst all the members of the
EAG.
We changed the heading Cooperatives to Agricultural and horticultural cooperatives under
Line 19, Domestic Production Activities Deduction, to clarify that the provision only applies to
these types of cooperatives.

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Instructions for Form 8903

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Draft
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2006

Department of the Treasury
Internal Revenue Service

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

What’s New
Final regulations. Final regulations
under section 199 were issued on
June 1, 2006. See Additional
Guidance, on this page.
Form W-2 wages. For tax years
beginning after May 17, 2006:
• The limit equal to 50% of Form W-2
wages is no longer based on Form
W-2 wages from all businesses. Only
wages properly allocable to domestic
production gross receipts are
included.
• The rules for determining Form
W-2 wages of partners and S
corporation shareholders are
simplified by determining wages
solely at the entity level.
See Form W-2 Wages, on page 5.
Simplified deduction method.
Under the final regulations, you may
be able to use the simplified
deduction method if your average
annual gross receipts are $100
million (up from $25 million) or less.
See Simplified Deduction Method on
page 4.

General Instructions
Purpose of Form
Use Form 8903 to figure your
domestic production activities
deduction (DPAD).
Your DPAD is generally 3% 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.
However, your DPAD generally
cannot be more than 50% of the
Form W-2 wages you paid to your
employees.

Additional Guidance
These instructions cover DPAD rules
from Internal Revenue Code section
199. They also cover a few rules
addressing common situations from
additional guidance. For more
information on the DPAD rules,
generally see Final Regulations
sections 1.199-1 through 1.199-9.
However, for tax years beginning
before June 1, 2006, you can choose
not to rely on any part of the final
regulations and rely instead on
guidance provided in 2005 by Notice
2005-14 and Proposed Regulations
sections 1.199-1 through 1.199-8.
But, for tax years beginning after May
17, 2006, you must figure Form W-2
wages with the changes discussed
above under Form W-2 Wages.
For guidance on computer
software provided to customers over
the Internet, also see Treasury
Decision 9262 and Announcement
2006-56.
You can find the final regulations
on page 1063 of Internal Revenue
Bulletin (I.R.B.) 2006-25 at www.irs.
gov/pub/irs-irbs/irb06-25.pdf. You can
find Notice 2005-14 on page 498 of
I.R.B. 2005-7 at www.irs.gov/pub/
irs-irbs/irb05-07.pdf. You can find the
proposed regulations on page 987 of
I.R.B. 2005-47 at www.irs.gov/pub/
irs-irbs/irb05-47.pdf. You can find
Treasury Decision 9262 on page
1040 of I.R.B. 2006-24 at www.irs.
gov/pub/irs-irbs/irb06-24.pdf. You can
find Announcement 2006-56 on page
342 of I.R.B. 2006-35 at www.irs.gov/
pub/irs-irbs/irb06-35.pdf.

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, 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
wages (or have 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
2.
Married individuals filing a joint
income tax return figure the deduction
on one Form 8903 using the
applicable items of both spouses.

Definitions and Special
Rules

Who Must File

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.

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

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.
• Partnership basis limit on losses.
• S corporation basis limit on losses.
• At-risk rules.
• Passive activity rules.

Cat. No. 39878Q

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Instructions for Form 8903

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• 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 qualified
production activities, after applying
the provisions listed above, can be
taken into account for purposes of
figuring the DPAD for the current tax
year. If any of the disallowed losses
or deductions are allowed in a later
tax year, you can take into account a
proportionate share of the expenses
reflected in those losses or
deductions in figuring QPAI in the
later tax year.
S corporations and partnerships.
The DPAD is applied at the
shareholder or partner level.
S corporations and partnerships need
to provide each shareholder or
partner with each item of information
the shareholder or partner needs to
figure the DPAD.
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.
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 for the tax
year that is distributed or required to
be distributed to the beneficiary or
retained by the estate or trust.
Agricultural and horticultural
cooperatives. Generally, an
agricultural or horticultural
cooperative can choose to allocate
all, some, or none of its allowable
DPAD 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 in whole or significant
part of any agricultural or horticultural
product, or
• Marketing of agricultural or
horticultural products.
An organization engaged in
marketing agricultural or horticultural
products is treated as having
manufactured, produced, grown, or
extracted in whole or significant part
any qualifying production property
marketed by the organization that its
patrons have so manufactured,
produced, grown, or extracted. For
this purpose, agricultural or

horticultural products include fertilizer,
diesel fuel, and other supplies used in
agricultural or horticultural production.

For details, see the Instructions for
Form 4626, Alternative Minimum
Tax —Corporations.

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
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 on 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.

Qualified Production
Activities Income (QPAI)

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 18 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.
-2-

Your allowable DPAD generally
cannot be more than 3% 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.
QPAI from an S corporation or
partnership. QPAI is generally
figured by the shareholder or partner
using information provided by the
S corporation or partnership on
Schedule K-1. However, certain small
S corporations and partnerships can
use the small business simplified
overall method (discussed on page 3)
to figure their QPAI and report each
shareholder’s or partner’s positive or
negative share on Schedule K-1.
Others must give shareholders or
partners the information they need to
separately figure QPAI. If you must
separately figure QPAI with
information provided by an
S corporation or partnership, see
Figuring QPAI, below.
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.

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.
3. Any lease, rental, license, sale,
exchange, or other disposition of the
following.
Instructions for Form 8903

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a. Qualifying production property
you manufacture, produce, grow or
extract in whole or in significant part
in the United States. See page 3 for
details.
b. Any qualified film you produce.
c. Electricity, natural gas, or
potable water you produce in the
United States.
However, 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.
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
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.
For details, see Final Regulations
section 1.199-1(d) or see section 4.03
of Notice 2005-14 and Proposed
Regulations section 1.199-1(d) as
discussed under Additional Guidance
on page 1.
Qualifying production property.
The following are qualifying
production property.
• Tangible personal property.
• Computer software.
• Sound recordings.
Instructions for Form 8903

Manufacturing, producing,
growing, or extracting.
Manufacturing, producing, growing,
and extracting 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 Final Regulations
section 1.199-3(e) or see section
4.04(3) of Notice 2005-14 and
Proposed Regulations section
1.199-3(d) as discussed under
Additional Guidance on page 1.

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 below),
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 Final Regulations
section 1.199-4 or see section 4.05 of
Notice 2005-14 and Proposed
Regulations section 1.199-4 as
-3-

discussed under Additional Guidance
on page 1.

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. However, you cannot
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.
• Small business simplified overall
method.
• Simplified deduction method.
• Section 861 method.
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 Revenue
Procedure 2002-28. You can find
Revenue Procedure 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

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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
small business simplified overall
method you can 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. The following
entities cannot use the small
business simplified overall method.
• Estates and trusts.
• Qualifying oil and gas partnerships.
• Certain partnerships owned by
expanded affiliated groups.
For details, see Final Regulations
section 1.199-4(f) or see Proposed
Regulations section 1.199-4(f)(4) as
discussed under Additional Guidance
on page 1.
S corporations and partnerships. If
eligible under the above rules, an
S corporation or partnership can use
the small business simplified overall
method to figure QPAI, which it can
then allocate to shareholders or
partners on Schedule K-1. A
shareholder or partner who is
allocated QPAI from an S corporation
or partnership must report that QPAI
on line 7. However, the shareholder
or partner may figure QPAI from other
sources using any method for which
the shareholder or partner is eligible.
Expanded affiliated groups. For
additional rules that apply to
expanded affiliated groups, see Final
Regulations section 1.199-4(f)(4) or
see section 4.05(5) of Notice 2005-14
and Proposed Regulations section
1.199-4(f)(3) as discussed under
Additional Guidance on page 1.

Simplified Deduction Method

Section 861 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 on page 3) are $100
million or less ($25 million or less if
you choose not to rely on any part of
the final regulations as discussed
under Additional Guidance on page
1).

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).

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 can 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.
S corporations and partnerships
cannot use the simplified deduction
method to figure QPAI. Instead, they
must include on Schedule K-1 the
information shareholders or partners
need to separately figure QPAI
(unless the S corporation or
partnership is using the small
business simplified overall method).
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 Final
Regulations section 1.199-4(e) or see
section 4.05(3)(d) of Notice 2005-14
and Proposed Regulations section
1.199-4(e)(2) as discussed under
Additional Guidance on page 1.
-4-

For details, see Final Regulations
section 1.199-4(d) or see section
4.05(3)(c) of Notice 2005-14 and
Proposed Regulations section
1.199-4(d) as discussed under
Additional Guidance on page 1.
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 and partnerships.
S corporations and partnerships
cannot use the section 861 method to
figure QPAI. Instead, they must
include on Schedule K-1 the
information shareholders or partners
need to separately figure QPAI
(unless the S corporation or
partnership is using the small
business simplified overall method).
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
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 3% 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
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• 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 9 on page 6 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 3% 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. 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.
Form W-2 Wages for tax years
beginning after May 17, 2006.
When figuring your DPAD for a tax
year beginning after May 17, 2006,
the limit equal to 50% of Form W-2
wages is no longer based on Form
W-2 wages from all businesses. Only
wages properly allocable to domestic
production gross receipts are
included. For more information, see
Treasury Decision 9293. You can find
Treasury Decision 9293 on page
1013 of I.R.B. 2006-48 at www.irs.
gov/pub/irs-irbs/irb06-48.pdf.
Form W-2 wages from an
S corporation or partnership. An
S corporation or partnership generally
will figure its Form W-2 wages and
report each shareholder’s or partner’s
share on Schedule K-1. However,
when figuring your DPAD for an S
corporation or partnership with a tax
year beginning before May 18, 2006,
your allocable share of Form W-2
wages from the S corporation or
partnership is limited to 6% of your
share of any QPAI derived from the
S corporation or partnership.
The S corporation or partnership
should have applied the 6% limit for
Form W-2 wages you report on line
13. However, you must apply the 6%
limit to Form W-2 wages you report
on line 12. If your share of QPAI
Instructions for Form 8903

derived from an S corporation or
partnership is zero or less, you
cannot use any of its Form W-2
wages to figure your DPAD.
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). However, when
figuring your DPAD for an estate or
trust with a tax year beginning before
May 18, 2006, your allocable share of
Form W-2 wages from the estate or
trust is limited to 6% of your share of
any QPAI derived from the estate or
trust. The estate or trust should have
applied the 6% limit.
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.
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, 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.
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.
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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).
More information. Additional
guidance provides rules that apply to
short tax years and the acquisition or
disposition of a trade or business. If
you need more information to figure
your Form W-2 wages, see Final
Regulations section 1.199-2 and Rev.
Proc. 2006-22 (for tax years
beginning before May 18, 2006) or
Rev. Proc. 2006-47 (for tax years
beginning after May 17, 2006) or see
section 4.02 of Notice 2005-14 and
Proposed Regulations section
1.199-2 as discussed under
Additional Guidance on page 1.
You can find Rev. Proc. 2006-22
on page 1033 of I.R.B. 2006-23 at
www.irs.gov/pub/irs-irbs/irb06-23.pdf.
You can find Rev. Proc. 2006-47 on
page 869 of I.R.B. 2006-45 at www.
irs.gov/pub/irs-irbs/irb06-45.pdf.

Specific Instructions
Line 1
Domestic Production
Gross Receipts (DPGR)
Enter your DPGR (defined on page
2).

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Estates and trusts. Estates and
trusts must reduce the amounts on
lines 1 through 4 by the percentage
of any QPAI allocated to
beneficiaries.

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 2
Allocable Cost of Goods
Sold

Line 12
Form W-2 Wages

If you are not using the small
business simplified overall method,
enter your allocable cost of goods
sold (discussed on page 3).

Line 3
Estates and trusts must allocate
directly allocable deductions or losses
between DPGR and non-DPGR
under Regulations section 1.652(b)-3
and enter the total on line 3.

Line 4
If you are using the small business
simplified overall method (discussed
on page 3), enter the amount of cost
of goods sold and other deductions or
losses you ratably apportion to
DPGR.
If you are using the simplified
deduction method (discussed on
page 4), enter the other deductions or
losses you ratably apportion to
DPGR.

Line 9
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 18 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.

Enter your Form W-2 wages
(discussed on page 5). Do not include
Form W-2 wages you must report on
line 13.
Estates and trusts. Estates and
trusts must reduce the amount on line
12 by the percentage of any Form
W-2 wages allocated to beneficiaries.

Line 18
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 on page 7.

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 Final or
Proposed Regulations section
1.199-7(h)(2) as discussed under
Additional Guidance on page 1.
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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
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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 Final or Proposed
Regulations section 1.199-7(d)(4) as
discussed under Additional Guidance
on page 1.
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
Final Regulations section
1.199-7(d)(4) or see section 4.09(4)
of Notice 2005-14 and Proposed
Regulations section 1.199-7(d)(4) as
discussed under Additional Guidance
on page 1.
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
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 8 through 12
and lines 14 through 16 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 18.
2. Completes lines 17 and 19.
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 1-16, and enters its
share of the group deduction on line
18 as a positive number.
2. Completes lines 17 and 19.
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.

Line 19
Domestic Production
Activities Deduction
Combine lines 16 through 18 and
enter the result on line 19 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 19, which includes any
amount allocated to patrons, is
deductible under section 199 by the
cooperative.

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 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.

Instructions for Form 8903

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