8903 Instructions for Form 8903

Instructions for Form 8903

Department of the Treasury
Internal Revenue Service

(Rev. December 2019)

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

General Instructions

share of the cooperative's DPAD to
include on Form 8903.

Future Developments

Purpose of Form

Married individuals filing a joint
income tax return figure the deduction
on one Form 8903 using the
applicable items of both spouses.

Your DPAD is generally 9% of the
smaller of:
1. Your qualified production
activities income (QPAI), or
2. Your adjusted gross income for
an individual, estate, or trust (taxable
income for all other taxpayers) figured
without the DPAD.

Note. Unless you were allocated a
share of a cooperative's DPAD or you
are a member of an expanded
affiliated group (EAG), you won't be
allowed a DPAD unless you can enter
on Form 8903 a positive amount for all
three of the following.
• Qualified production activities
income (QPAI).
• Adjusted gross income for an
individual, estate, or trust (taxable
income for all other taxpayers).
• Form W-2 wages you paid to your
employees. If you didn't pay any Form
W-2 wages (or have Form W-2 wages
allocated to you on a Schedule K-1),
you can't claim a DPAD.

For the latest information about
developments related to Form 8903
and its instructions, such as
legislation enacted after they were
published, go to IRS.gov/Form8903.
Future revisions of Form 8903.
The IRS will revise the December
2018 version of Form 8903 only when
necessary. Continue to use the 2018
version of Form 8903 for tax years
beginning after 2017 until a new
revision is issued.

What's New
Domestic production activities deduction (DPAD). DPAD under
former section 199 has been repealed
for tax years beginning after 2017.
Taxpayers using Form 8903 to
compute DPAD for tax years, or items
arising from tax years, prior to repeal
should use the Instructions for Form
8903 dated December 2018.
For specified agricultural or
horticultural cooperatives (specified
cooperatives), a deduction under
section 199A(g) for income
attributable to domestic production
activities is available for tax years
beginning after 2017. Specified
cooperatives may use Form 8903, as
applicable, to calculate the section
199A(g) deduction.
For further guidance, until final
regulations are published in the
Federal Register, taxpayers may
generally rely on the Proposed
Regulations (REG-118425-18),
published June 19, 2019, provided
the taxpayer applies the rules in their
entirety and in a consistent manner.
For purposes of the W-2 Wage
Limitation, also see Notice 2019-27,
2019-31 IRB, page 484 available at
IRS.gov/IRB/2019-31.

Dec 20, 2019

Use Form 8903 to figure your
domestic production activities
deduction (DPAD).

Reduced DPAD for oil-related
QPAI. A taxpayer with oil-related
QPAI also must reduce the DPAD by
3% of the least of the following
amounts.
• Oil-related QPAI.
• QPAI.
• Adjusted gross income for an
individual, estate, or trust (taxable
income for all other taxpayers) figured
without DPAD.
DPAD limited to wages paid. Your
DPAD generally can't be more than
50% of the Form W-2 wages you paid
to your employees that are properly
allocable to domestic production
gross receipts (including Form W-2
wages allocated to you on a
Schedule K-1).

Who Must File
DPAD for income attributable to
domestic production activities before 2018. Individuals, corporations,
cooperatives, estates, and trusts use
Form 8903 to figure their allowable
DPAD from certain trade or business
activities.
Shareholders of S corporations and
partners include information provided
by the S corporation or partnership
when figuring their allowable DPAD.
Beneficiaries of an estate or trust
include information provided by the
estate or trust when figuring their
allowable DPAD. Patrons of certain
agricultural or horticultural
cooperatives may be allocated a
Cat. No. 39878Q

For details, see the discussions of
these three items, later.
DPAD for income attributable to
domestic production activities after 2017. DPAD has been repealed
for tax years beginning after 2017.
Don’t use Form 8903 to claim DPAD
for 2018 or later years unless:
1. Your tax year began before
January 1, 2018,
2. You are a shareholder in an S
corporation or partner in a partnership
and the entity has a tax year that
began before January 1, 2018,
3. You are a beneficiary of an
estate or trust and the estate or trust
has a tax year that began before
January 1, 2018,
4. You are a patron of an
agricultural or horticultural cooperative
with a tax year that began before
January 1, 2018.
Specified cooperatives’ DPAD after 2017. For tax years beginning on
or after January 1, 2018, specified
agricultural or horticultural
cooperatives to which part I of
subchapter T applies may qualify for a
deduction under section 199A(g).

For agricultural or horticultural
cooperatives’ utilizing Form 8903 to
compute a deduction under section
199A(g), write “SPECIFIED
COOPERATIVE DPAD” across the
top of Form 8903. The Form 8903
must be attached to the cooperative’s
return.

Definitions and Special
Rules
Trade or business. QPAI and Form
W-2 wages are figured by only taking
into account items that are attributable
to the actual conduct of a trade or
business. An activity qualifies as a
trade or business if your primary
purpose for engaging in the activity is
for income or profit and you are
involved in the activity with continuity
and regularity. For example, a
sporadic activity or a hobby doesn't
qualify as a trade or business.
Coordination with other deductions. Expenses that otherwise
would be taken into account for
purposes of figuring the DPAD are
only taken into account if and to the
extent the losses and deductions from
all of your activities aren't disallowed
by a provision of the Internal Revenue
Code, including the following.
• Basis limits on a partner's share of
partnership losses.
• Basis limits on a shareholder's
share of S corporation losses.
• At-risk rules.
• Passive activity rules.
If only a portion of your losses or
deductions are allowed in the current
tax year, a proportionate share of the
losses or deductions that reflect
expenses allocated to your gross
receipts from qualified production
activities, after applying the provisions
discussed earlier, is taken into
account for purposes of figuring the
DPAD for the current tax year. If any
of the losses or deductions disallowed
for tax years beginning after 2004 are
allowed in a later tax year, a
proportionate share of the expenses
reflected in those losses or
deductions is taken into account in
figuring the DPAD in the later tax year.
A net operating loss under section
172 generally is figured without the
section 199 deduction.
S corporations and partnerships.
The DPAD is applied at the
shareholder or partner level. Certain S

corporations and partnerships can
figure QPAI and Form W-2 wages at
the entity level and allocate and report
these amounts to shareholders and
partners. See Qualified Production
Activities Income (QPAI) and Form
W-2 Wages for more information.
All other S corporations and
partnerships need to provide each
shareholder or partner with
information the shareholder or partner
needs to figure the DPAD.
Film production. S corporation
shareholders or partners that own
20% or more (directly or indirectly) of
the capital interests in the S
corporation or the partnership are
treated as having engaged directly in
any film produced by the S
corporation or partnership, and the S
corporation or partnership is treated
as having engaged directly in any film
produced by the S corporation
shareholder or partner. See section
199(d)(1)(A)(iv) for more information.
Estates and trusts. Generally, an
estate or trust will figure its:
• QPAI (which may be less than
zero), and
• Form W-2 wages it paid to its
employees (including Form W-2
wages allocated to it on a
Schedule K-1).
These items are then allocated among
the estate or trust and its beneficiaries
based on the relative proportion of the
estate's or trust's distributable net
income (DNI) for the tax year that is
distributed or required to be
distributed to the beneficiary or
retained by the estate or trust. If the
estate or trust has no DNI for the tax
year, QPAI and Form W-2 wages are
allocated entirely to the estate or trust.
Although estates and trusts actually
allocate their QPAI and Form W-2
wages to beneficiaries as discussed
earlier, when completing Form 8903
they must reduce the amounts
reported on lines 8 and 18 to reflect
the portion of those amounts that
were allocated to beneficiaries as
QPAI or Form W-2 wages. For details,
see Line 9, later.
Agricultural and horticultural cooperatives. Generally, an
agricultural or horticultural cooperative
can choose to allocate all, some, or
none of its allowable DPAD (but not
QPAI) to its patrons.

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An agricultural or horticultural
cooperative is an organization
described in section 1381 that is
engaged in:
• Manufacturing, producing, growing,
or extracting (MPGE) in whole or
significant part any agricultural or
horticultural product, or
• Marketing agricultural or
horticultural products that its patrons
have MPGE.
Agricultural or horticultural products
for this purpose include fertilizer,
diesel fuel, and other supplies used in
agricultural or horticultural production.
An organization engaged in marketing
agricultural or horticultural products is
treated as having MPGE in whole or in
significant part any qualifying
production property marketed by the
organization that its patrons have
MPGE.
Allocation of cooperative DPAD.
Qualified payments are the patronage
dividends and per-unit retain
allocations paid to patrons on which
the cooperative computed its DPAD.
A patron who receives a qualified
payment can be allocated any portion
of the DPAD allowed with respect to
the portion of the QPAI to which such
payment is attributable. The
cooperative must identify the portion
of its DPAD allocated to a patron in a
written notice mailed to the patron no
later than the 15th day of the 9th
month following the close of the
cooperative's tax year. The qualified
payments and allocated DPAD will
also be reported to patrons that aren't
corporations on Form 1099-PATR,
Taxable Distributions Received From
Cooperatives.
Note. For purposes of section 199,
patrons of agricultural or horticultural
cooperatives can't include any
distributions of qualified payments
from the cooperative in the
computation of their DPAD.
Allocation of patronage and
nonpatronage income and
deductions. Cooperatives must
calculate the DPAD separately to
determine patronage and
nonpatronage income or losses for
purposes of determining unused
patronage or nonpatronage losses on
lines 12 and 13, respectively, of
Schedule G, Form 1120-C.
If you have only patronage income
and deductions, complete the Form
Instructions for Form 8903 (Rev. 12-2019)

8903 as described in the instructions.
However, if you have both patronage
and nonpatronage income and
deductions, see Line 25 before
completing Form 8903.
Expanded affiliated groups
(EAGs). All members of an EAG are
treated as a single corporation to
figure their DPAD. The DPAD is
allocated among the members of the
group in proportion to each member's
respective amount (if any) of QPAI.
See Line 24 before completing Form
8903.
An EAG is an affiliated group as
defined in section 1504(a)
determined:
• By substituting "more than 50%" for
"at least 80%" each place it appears,
and
• Without regard to paragraphs (2)
and (4) of section 1504(b).
A corporation's status as a member
of an EAG is determined on a daily
basis. Also, if a corporation joins or
leaves an EAG, its status as a
member of the EAG is determined at
the end of the day on which it joins or
leaves the EAG.
If all the capital and profits interests
of a partnership are owned by
members of a single EAG at all times
during the partnership's tax year, the
partnership and all members of the
group are treated as a single taxpayer
to figure their domestic production
gross receipts (DPGR) for that tax
year.
Alternative minimum tax (AMT).
For taxpayers other than corporations,
the DPAD used to determine regular
tax is also used to determine
alternative minimum taxable income
(AMTI). Corporations use AMTI
(instead of taxable income) figured
without the DPAD to figure the
alternative minimum DPAD used to
determine AMTI.
For details on how corporations
figure DPAD for AMT, see the
Instructions for Form 4626.
Statistical sampling. You are
generally allowed to use statistical
sampling for purposes of calculating
the DPAD. For details about
acceptable statistical sampling
methodologies, see Rev. Proc.
2007-35 and Rev. Proc. 2011-42. You
can find Rev. Proc. 2007-35 on
page 1349 of I.R.B. 2007-23 at
IRS.gov/pub/irs-irbs/irb07-23.pdf. You
Instructions for Form 8903 (Rev. 12-2019)

can find Rev. Proc. 2011-42 on
page 318 of I.R.B. 2011-37 at
IRS.gov/pub/irs-irbs/irb11-37.pdf.

Qualified Production
Activities Income (QPAI)

Your allowable DPAD generally can't
be more than 9% of your QPAI. If you
don't have QPAI, you generally aren't
allowed a DPAD. However, you don't
need QPAI to claim a DPAD you are
allocated as a patron of an agricultural
or horticultural cooperative.
Figuring QPAI. QPAI is the excess
(if any) of:
1. Domestic production gross
receipts (DPGR), over
2. The sum of:
a. Cost of goods sold allocable to
DPGR, and
b. Other expenses, losses, or
deductions (other than the DPAD)
which are properly allocable to DPGR.
Oil-related QPAI. A taxpayer with
oil-related QPAI must reduce the
DPAD by 3% of the least of the
following amounts.
• Oil-related QPAI.
• QPAI.
• Adjusted gross income for an
individual, estate, or trust (taxable
income for all other taxpayers) figured
without the DPAD.
Oil-related QPAI is QPAI
attributable to the production, refining,
processing, transportation, or
distribution of oil or gas, or any
primary product from oil or gas (as
used in section 927(a)(2)(C) before its
repeal).
Costs related to transportation.
When figuring QPAI and oil-related
QPAI for tax years beginning after
2015, only 25% of properly allocated
costs related to the transportation of
oil are allocable to DPGR if the
taxpayer is in the trade or business of
refining crude oil and is not a major
integrated oil company (as defined in
section 167(h)(5)(B) without regard to
clause (iii)).
Primary products from oil.
Primary products from oil are oil and
all products derived from the
destructive distillation of oil, including
volatile products, light oils such as
motor fuel and kerosene, distillates
such as naphtha, lubricating oils,

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greases, and waxes, and residues
such as fuel oil.
Primary products from gas.
Primary products from gas are all gas
and associated hydrocarbon
components from gas or oil wells,
whether recovered at the lease or
upon further processing, including
natural gas; condensates; liquefied
petroleum gases such as ethane,
propane, and butane; and liquid
products such as natural gasoline.
See Temporary Regulations
section 1.927(a)-1T(g)(2) for
additional information.
S corporations and partnerships.
S corporations and partnerships that
meet specific requirements can
choose to figure QPAI at the entity
level and allocate QPAI to
shareholders or partners. The
shareholder or partner then combines
the allocated portion with QPAI from
other sources on Form 8903 to
determine the DPAD. S corporations
or partnerships that aren't eligible to
figure QPAI at the entity level must
report each shareholder's or partner's
share of deductions, expenses, or
losses on Schedule K-1 with other
information the shareholder or partner
needs to figure their DPAD.
QPAI from an estate or trust. An
estate or trust will figure its QPAI and
report each beneficiary's share on
Schedule K-1 (Form 1041).
Cooperatives. Cooperatives figure
QPAI without any deduction for
patronage dividends, per-unit retain
allocations, or nonpatronage
distributions under section 1382(b) or
(c).

Domestic Production Gross
Receipts (DPGR)

Using any reasonable method that is
satisfactory to the Secretary based on
the facts and circumstances, you
must determine whether gross
receipts qualify as DPGR on an
item-by-item basis (and not, for
example, on a division-by-division,
product line-by-product line, or
transaction-by-transaction basis);
however, see Regulations section
1.199-3(d)(2) for special rules and
Regulations section 1.199-(3)(d)(3)
for an exception. See Regulations
section 1.199-(3)(d)(4) for examples.

DPGR activities. Generally, your
gross receipts (defined later) derived

from the following activities are
DPGR.
1. Construction of real property
you perform in the United States in
your construction trade or business.
2. Engineering or architectural
services you perform in the United
States in your engineering or
architectural services trade or
business for the construction of real
property in the United States.
3. Any lease, rental, license, sale,
exchange, or other disposition of the
following.
a. Qualifying production property
you manufacture, produce, grow, or
extract in whole or in significant part in
the United States. See Qualifying
Production Property and
Manufacturing, producing, growing, or
extracting, later, for details.
b. Any qualified film you produce.
c. Electricity, natural gas, or
potable water you produce in the
United States.
In general, gross receipts derived
from the following activities aren't
DPGR.
• Activities not attributable to the
actual conduct of a trade or business.
• The sale of food and beverages you
prepare at a retail establishment.
• The lease, rental, or license of
property between certain persons
treated as a single employer.
• The lease, rental, license, sale,
exchange, or other disposition of land.
• The transmission or distribution of
electricity, natural gas, or potable
water.
• Advertising and product-placement;
however, see Regulations section
1.199-3(i)(5)(ii) for exceptions.
• Customer and technical support,
telephone and other
telecommunications services, online
services (including Internet access
services, online banking services, and
providing access to online electronic
books, newspapers, and journals),
and other similar services; however,
see Regulations section 1.199-3(i)(6)
(iii) for exceptions.
Activities in the United States.
For purposes of determining DPGR,
the United States includes the 50
states, the District of Columbia, the
territorial waters of the United States,
and the seabed and subsoil of those
submarine areas that are adjacent to
the territorial waters of the United

States and over which the United
States has exclusive rights, in
accordance with international law,
with respect to the exploration and
exploitation of natural resources. The
United States does not include
possessions and territories of the
United States or the airspace or space
over the United States and these
areas.
Activities in Puerto Rico. For
purposes of determining DPGR, the
United States includes Puerto Rico for
a taxpayer who has gross receipts
from sources within Puerto Rico that
are subject to tax under sections 1 or
11, but only for the first 12 tax years of
the taxpayer that begin after 2005 and
before 2018.
Gross receipts. Your gross receipts
are receipts that are recognized under
your method of accounting for the tax
year. Gross receipts include the
following amounts from your trade or
business activities.
• Total sales (net of returns and
allowances).
• Amounts received for services, not
including wages received as an
employee.
• Income from investments and from
incidental or outside sources
(including sales of business property).
• Amounts received that are allocable
to the payment of sales tax or other
similar state and local taxes if the tax
is legally imposed on you.
Gross receipts are generally not
reduced by the:
• Cost of goods sold, or
• Adjusted basis of property (other
than capital assets) sold or otherwise
disposed of if such property is
described in section 1221(a)(1)
through (5).
Allocation of gross receipts. You
generally must allocate your gross
receipts between DPGR and
non-DPGR. Allocate gross receipts
using a reasonable method that
accurately identifies gross receipts
that are DPGR. However, if less than
5% of your gross receipts are
non-DPGR, you can treat all of your
gross receipts as DPGR. Also, if less
than 5% of your gross receipts are
DPGR, you can treat all of your gross
receipts as non-DPGR.
For details, see Regulations
section 1.199-1(d).

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EAG partnerships. A partnership is
an EAG partnership if a single EAG
owns all the interests in the capital
and profits of the partnership at all
times during the tax year. If the
requirements are met, the EAG
partnership and all members of the
EAG are treated as a single taxpayer
for purposes of determining the
amount of domestic production gross
receipts (DPGR).
Special rules apply to the
attribution of gross receipts (a) to a
member of the EAG from the
disposition of property an EAG
partnership engaged in MPGE, and
(b) to an EAG partnership from the
disposition of property another EAG
partnership engaged in MPGE, both
of which are members of the same
EAG. See Regulations section
1.199-3(i)(8) for more information,
exceptions, and other rules.
Qualifying Production Property
The following are qualifying
production property.
• Tangible personal property.
• Computer software.
• Sound recordings.
Tangible personal property.
Tangible personal property includes
any tangible property other than land,
buildings (including structural
components), computer software,
sound recordings, qualified films,
electricity, natural gas, or potable
water. Tangible personal property
also includes any gas (other than
natural gas), chemical, and similar
property, such as steam, oxygen,
hydrogen, or nitrogen.
Machinery, printing presses,
transportation and office equipment,
refrigerators, grocery counters, testing
equipment, display racks and shelves,
and neon and other signs that are
contained in or attached to a building
constitute tangible personal property.
Note. Local law doesn't control
whether property is tangible personal
property.
See Regulations 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
Instructions for Form 8903 (Rev. 12-2019)

perform a desired function or set of
functions, and the documentation
required to describe or maintain that
program or routine. An electronic
book online or for download doesn't
constitute computer software.
• Machine-readable code for (a)
video games or similar programs, (b)
equipment that is an integral part of
other property, and (c) typewriters,
calculators, adding and accounting
machines, copiers, duplicating
equipment, and similar equipment,
even if the program isn't designed to
operate on a computer as defined in
section 168(i)(2)(B).
• Computer programs of all classes,
including operating systems,
executive systems, monitors,
compilers and translators, assembly
routines, utility programs, and
application programs.
• Any incidental and ancillary rights
that are necessary for the acquisition
of the title to, the ownership of, or the
right to use computer software, and
that are used only in connection with
that specific software. These
incidental and ancillary rights aren't
included in the definition of a
trademark or trade name under
Regulations section 1.197-2(b)(10)(i).
Exception. Computer software
doesn't include any data or
information base unless the data or
information base is in the public
domain and is incidental to a
computer program.
Example. If a word processing
program includes a dictionary feature
that may be used to spell-check a
document, then the entire program
(including the dictionary feature) is a
computer software program
regardless of the form in which the
dictionary feature is maintained or
stored.
See Regulations section 1.199-3(j)
(3) for more information.
Sound recordings. Sound
recordings include any works that
result from the fixation of a series of
musical, spoken, or other sounds. The
definition of sound recordings is
limited to the master copy of the
recordings (or other copy from which
the holder is licensed to make and
produce copies), and if the medium
(such as compact discs, tapes, or
other phonorecordings) in which the
sounds may be embodied is tangible,
Instructions for Form 8903 (Rev. 12-2019)

then the medium is considered
tangible personal property.
Exception. Sound recordings
don't include the creation of
copyrighted material in a form other
than a sound recording, such as lyrics
or music composition.
See Regulations section 1.199-3(j)
(4) for more information.
Manufacturing, producing, growing, or extracting (MPGE). MPGE
generally include the following trade
or business activities.
• Activities related to manufacturing,
producing, growing, extracting,
installing, developing, improving, and
creating qualifying production
property.
• Making qualifying production
property (QPP) out of scrap, salvage,
or junk material, or from new or raw
material by processing, manipulating,
refining, or changing the form of an
article, or by combining or assembling
two or more articles.
• Cultivating soil, raising livestock,
fishing, and mining minerals.
• Storage, handling, or other
processing activities (other than
transportation activities) in the United
States related to the sale, exchange,
or other disposition of agricultural
products, provided the products are
consumed in connection with, or
incorporated into, manufacturing,
producing, growing, or extracting
QPP, whether or not by the taxpayer.
Generally, the packaging,
repackaging, labeling, or minor
assembly of QPP does not qualify as
an MPGE activity unless you engage
in another MPGE activity with respect
to that QPP. Furthermore, the
installation of qualifying production
property does not qualify as an MPGE
activity unless you MPGE the
qualifying production property being
installed and you have the benefits
and burdens of ownership of the QPP
under federal income tax principles
during the installation period.
For details, see Regulations
section 1.199-3(e). Your MPGE of
QPP must be in whole or in significant
part within the United States. See
Regulations section 1.199-3(f) and
(g).
Qualifying in-kind partnerships.
In general, partners of qualifying
in-kind partnerships are treated as
manufacturing, producing, growing, or
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extracting the property they receive as
a distribution from the partnership. For
purposes of section 199, a qualifying
in-kind partnership is a partnership
engaged in any of the following
activities.
• The extraction, refining, or
processing of oil, natural gas (as
described in Regulations section
1.199-3(l)(2)), petrochemicals, or
products derived from oil, natural gas,
or petrochemicals, in whole or
significant part within the United
States.
• The production or generation of
electricity in the United States.
• The extraction and processing of
minerals (as defined in Regulations
section 1.611-1(d)(5)) within the
United States.
• Any other industry or activity
designated as an industry or activity of
a qualifying in-kind partnership by
publication in the Internal Revenue
Bulletin.
For more information on qualifying
in-kind partnerships, see Regulations
sections 1.199-3(i)(7). For qualifying
in-kind partnerships engaged solely in
the extraction and processing of
minerals, see Rev. Rul. 2007-30 on
page 1277 of I.R.B. 2007-21 at
IRS.gov/pub/irs-irbs/irb07-21.pdf.
Qualified Film
A qualified film is any motion picture
film, video tape, or live or delayed
television programming for which 50%
or more of the total compensation
required to produce the film is paid for
services performed by actors,
production personnel, directors, and
producers in the United States.
A qualified film includes the
copyrights, trademarks, or other
intangibles related to the film. Also, a
DPAD can be taken for the production
of a qualified film regardless of the
methods and means by which the film
is distributed.
See section 199(c)(6) and
Regulations section 1.199-3(k) for
more information. For special rules
related to S corporations,
partnerships, S corporation
shareholders, and partners
participating in the production of films,
see Film production under S
corporations and partnerships, earlier.

Cost of Goods Sold

When figuring QPAI, cost of goods
sold includes the:
• Cost of goods sold to customers,
and
• Adjusted basis of non-inventory
property you sold or otherwise
disposed of in your trade or business.
Allocation of cost of goods sold.
Generally, you must allocate your cost
of goods sold between DPGR and
non-DPGR using a reasonable
method. If you use a method to
allocate gross receipts between
DPGR and non-DPGR, the use of a
different method to allocate cost of
goods sold won't be considered
reasonable, unless it is more
accurate. However, if you qualify to
use the small business simplified
overall method, you can use it to
apportion both cost of goods sold and
other deductions, expenses, and
losses between DPGR and
non-DPGR. For more information
about this allocation method, see
Small Business Simplified Overall
Method, later.
For details about allocating cost of
goods sold, see Regulations section
1.199-4.

Other Deductions, Expenses, or
Losses
When figuring QPAI, other
deductions, expenses, or losses
include all deductions, expenses, or
losses from a trade or business other
than cost of goods sold and employee
business expenses.

Allocation and apportionment of
other deductions, expenses, or
losses. You must generally use one
of the following three methods to
allocate and apportion other trade or
business deductions, expenses, or
losses between DPGR and
non-DPGR.
• Small business simplified overall
method. (You must qualify to use this
method.)
• Simplified deduction method. (You
must qualify to use this method.)
• Section 861 method.
However, don't allocate and
apportion a net operating loss
deduction or deductions not
attributable to the conduct of a trade
or business to DPGR under any of the
methods.

S corporations and
partnerships. S corporations and
partnerships that meet specific
requirements can choose to figure
QPAI at the entity level and allocate
the QPAI to shareholders or partners.
S corporations or partnerships that
aren't eligible to figure QPAI under
those rules must report each
shareholder's or partner's share of its
deductions, expenses, or losses on
Schedule K-1 with other information
the shareholder or partner needs to
figure their DPAD.
Estates and trusts. An estate or
trust allocates directly attributable
trade or business deductions,
expenses, or losses between DPGR
and non-DPGR under Regulations
section 1.652(b)-3. An estate or trust
that is eligible must use the simplified
deduction method to allocate
indirectly attributable trade or
business deductions, expenses, or
losses between DPGR and
non-DPGR. Otherwise, the estate or
trust uses the section 861 method to
allocate these indirect items.
Small Business Simplified Overall
Method
You generally can use the small
business simplified overall method to
apportion cost of goods sold and
other deductions, expenses, and
losses between DPGR and
non-DPGR if you meet any of the
following tests.
• You are engaged in the trade or
business of farming and aren't
required to use the accrual method of
accounting (see section 447).
• Your average annual gross receipts
(defined below) are $5 million or less.
• You are eligible to use the cash
method of accounting under Rev.
Proc. 2002-28. You can find Rev.
Proc. 2002-28 on page 815 of I.R.B.
2002-18 at IRS.gov/pub/irs-irbs/
irb02-18.pdf.
Under the small business simplified
overall method, your total cost of
goods sold and other deductions,
expenses, and losses are ratably
apportioned between DPGR and
non-DPGR based on relative gross
receipts.
Example. Your total cost of goods
sold and other trade or business
deductions, expenses, or losses are
$400 and don't include a net operating
-6-

loss deduction. You have $1,000 total
gross receipts and $750 DPGR. Your
DPGR equal 75% of your total gross
receipts. Under the small business
simplified overall method, you
subtract $300 ($400 × 0.75) of your
total cost of goods sold and other
trade or business deductions,
expenses, or losses from your DPGR
to figure your QPAI, which is $450
($750 - $300).
Average annual gross receipts.
For this purpose, your average annual
gross receipts are your average
annual gross receipts for the
preceding 3 tax years. If your
business hasn't been in existence for
3 tax years, base your average on the
period it has existed. Include any
short tax years by annualizing the
short tax year's gross receipts by (a)
multiplying the gross receipts for the
short period by 12, and (b) dividing
the result by the number of months in
the short period.
Estates and trusts. Estates and
trusts can't use the small business
simplified overall method.
S corporations and partnerships.
An S corporation or partnership (other
than a qualifying in-kind partnership or
expanded affiliated group partnership)
can choose to use the small business
simplified overall method to figure
QPAI at the entity level and allocate
that QPAI to shareholders or partners
if it meets the requirements of an
eligible small pass-through entity. A
shareholder or partner who is
allocated QPAI from an eligible small
pass-through entity must report that
QPAI on line 7.
For a definition of a qualifying
in-kind partnership, see Regulations
section 1.199-3(i)(7). For a definition
of an expanded affiliated group
partnership, see Regulations section
1.199-3(i)(8).
An S corporation or partnership is
an eligible small pass-through entity if
it meets each of the following
requirements for the current tax year.
• It satisfies one of the following
requirements: (a) it has average
annual gross receipts for the 3 tax
years preceding the current tax year
of $5 million or less, (b) it is engaged
in the trade or business of farming and
isn't required to use the accrual
method of accounting, or (c) it is
eligible to use the cash method of
Instructions for Form 8903 (Rev. 12-2019)

accounting under Rev. Proc. 2002-28
(that is, it has average annual gross
receipts of $10 million or less and isn't
excluded from using the cash method
under section 448 of the Internal
Revenue Code).
• It has total cost of goods sold and
deductions (excluding the net
operating loss deduction) added
together of $5 million or less.
• It has DPGR.
• If a partnership, it doesn't have a
partner that is an ineligible partnership
(qualifying in-kind partnerships or
expanded affiliated group
partnerships).
Expanded affiliated groups. For
additional rules that apply to
expanded affiliated groups, see
Regulations section 1.199-4(f)(4).
Oil-related production activities. If
you have oil-related QPAI, and you
choose to use the small business
simplified overall method, you must
allocate part of these costs to DPGR
from oil-related production activities to
determine oil-related QPAI. See
Line 4, later.
For details about the small
business simplified overall method,
see Regulations section 1.199-4(f).
Simplified Deduction Method
You generally can use the simplified
deduction method to apportion other
deductions, expenses, and losses
(but not cost of goods sold) between
DPGR and non-DPGR if you meet
either of the following tests.
• Your total trade or business assets
at the end of your tax year are $10
million or less.
• Your average annual gross receipts
(defined above) are $100 million or
less.
Under the simplified deduction
method, your other trade or business
deductions, expenses, or losses are
ratably apportioned between DPGR
and non-DPGR based on relative
gross receipts.
Example. Your total other trade or
business deductions, expenses, or
losses are $400 and don't include a
net operating loss. You have $240 of
cost of goods sold allocable to DPGR.
You have $1,000 total gross receipts
and $600 DPGR. Your DPGR equal
60% of your total gross receipts.
Under the simplified deduction
method, you subtract $240 ($400 ×
Instructions for Form 8903 (Rev. 12-2019)

0.60) of your total other trade or
business deductions, expenses, or
losses from your DPGR to figure your
QPAI, which is $120 ($600 - $240 $240).
S corporations and partnerships.
An S corporation or partnership (other
than a qualifying in-kind partnership or
expanded affiliated group partnership)
can choose to use the simplified
deduction method to figure QPAI at
the entity level and allocate that QPAI
to shareholders or partners if it meets
the requirements of an eligible widely
held pass-through entity. A
shareholder or partner who is
allocated QPAI from an eligible widely
held pass-through entity must report
that QPAI on line 7.
For a definition of a qualifying
in-kind partnership, see Regulations
section 1.199-3(i)(7). For a definition
of an expanded affiliated group
partnership, see Regulations section
1.199-3(i)(8).
An S corporation or partnership is
an eligible widely held pass-through
entity if it meets each of the following
requirements for its current tax year.
• Either of the two tests discussed
earlier under Simplified Deduction
Method.
• It has total cost of goods sold and
deductions added together of $100
million or less.
• It has DPGR.
• On every day during the current tax
year, all of its shareholders or partners
are individuals, estates, or trusts
described (or treated as described) in
section 1361(c)(2).
• On every day during the current tax
year, no shareholder or partner owns,
alone or combined with the ownership
interests of all related persons, more
than 10% of (a) total shares of the S
corporation or (b) the profits or capital
interests in the partnership.
Estates and trusts. If eligible by
meeting one of the two tests
described earlier, an estate or trust
must use the simplified deduction
method to allocate its indirectly
attributable trade or business
deductions, expenses, or losses
between DPGR and non-DPGR. All
estates and trusts must allocate
directly attributable deductions,
expenses, or losses between DPGR
and non-DPGR under Regulations
section 1.652(b)-3.
-7-

Expanded affiliated groups. For
additional rules that apply to
expanded affiliated groups, see
Regulations section 1.199-4(e)(4).
Oil-related production activities. If
you have oil-related QPAI, and you
choose to use the simplified
deduction method, you must allocate
part of these costs to DPGR from
oil-related production activities to
determine oil-related QPAI. See
Line 3, later.
Section 861 Method
You don't have to meet any tests to
use the section 861 method. Under
the section 861 method, you generally
must apply the rules of the section
861 regulations to allocate and
apportion other trade or business
deductions, expenses, or losses
between DPGR and non-DPGR.
Section 199 is treated as an
“operative section” described in
Regulations section 1.861-8(f).
For details, see Regulations
section 1.199-4(d).
For guidance on automatic
approval to change certain elections
relating to the apportionment of
interest expense and research and
experimentation expenditures, see
Rev. Proc. 2006-42. You can find
Rev. Proc. 2006-42 on page 931 of
I.R.B. 2006-47 at IRS.gov/pub/irs-irbs/
irb06-47.pdf.
S corporations. An S corporation
can't use the section 861 method to
figure QPAI. Unless it is eligible to use
the small business simplified overall
method or simplified deduction
method, an S corporation must report
each shareholder's share of its
deductions, expenses, or losses on
Schedule K-1 (Form 1120S) that the
shareholder needs to figure their
DPAD.
Partnerships. A partnership (other
than a qualifying in-kind partnership or
expanded affiliated group partnership)
can choose to use the 861 method to
figure QPAI at the entity level and
allocate that QPAI to qualifying
partners (defined later) if it meets the
requirements of an eligible 861
partnership. A partner who is
allocated QPAI from an eligible 861
partnership must report that QPAI on
line 7.

For a definition of a qualifying
in-kind partnership, see Regulations
section 1.199-3(i)(7). For a definition
of an expanded affiliated group
partnership, see Regulations section
1.199-3(i)(8).
An eligible 861 partnership must
meet the following requirements for its
current tax year.
• It has at least 100 partners on any
day during the partnership's tax year.
• At least 70% of the partnership is
owned, at all times during its tax year,
by qualifying partners (defined next).
• It has DPGR.
Qualifying partner. A qualifying
partner is a partner that, on each day
during the partnership's tax year that
the partner owns an interest in the
partnership:
• Is not a general partner or a
managing member of a partnership
organized as a limited liability
company,
• Doesn't materially participate
(discussed later) in the activities of the
partnership,
• Doesn't hold, alone or combined
with the interests of all related
persons (defined next), 5% or more of
the profits or capital interests in the
partnership,
• Is not an ineligible entity (qualifying
in-kind partnership or expanded
affiliated group partnership).
Related persons. For purposes of
determining whether a partner is a
qualifying partner, persons are related
if they meet the requirements of
sections 267(b) or 707(b),
disregarding sections 267(e)(1) and
(f)(1)(A).
Material participation. A
qualifying partner can't materially
participate in the activities of the
partnership. See section 5.05 of Rev.
Proc. 2007-34 for the definition of
material participation.
Non-qualifying partners. An
eligible 861 partnership can't allocate
QPAI to non-qualifying partners (see
Qualifying partner, earlier). Instead,
the partnership must report each
non-qualifying partner's share of
deductions, expenses, or losses on
Schedule K-1 that the partner needs
to figure their DPAD. The partnership
items allocated to non-qualifying
partners must be excluded for
purposes of figuring QPAI at the
partnership level.

Estates and trusts. An estate or
trust that can't use the simplified
deduction method must use the
section 861 method to allocate and
apportion its indirectly attributable
trade or business deductions,
expenses, or losses between DPGR
and non-DPGR. All estates and trusts
must allocate directly attributable
deductions, expenses, or losses
between DPGR and non-DPGR under
Regulations section 1.652(b)-3.
Oil-related production activities. If
you have oil-related QPAI, apply the
rules of section 861 to determine the
amount of other trade or business
deductions, expenses, or losses to
deduct for purposes of determining
oil-related QPAI.

Adjusted Gross or Taxable
Income

Your allowable DPAD generally can't
be more than 9% of your adjusted
gross income if you are an individual,
estate, or trust (taxable income for all
other taxpayers) figured without the
DPAD. If you don't have adjusted
gross or taxable income, you
generally aren't allowed a DPAD.

Note. Although patrons without
adjusted gross or taxable income can
claim a DPAD, the DPAD can't create
or increase a net operating loss under
section 172(d). However, you don't
need taxable income to claim a DPAD
you are allocated as a member of an
Expanded Affiliated Group (EAG), and
the DPAD can create or increase a
net operating loss under Regulations
section 1.199-7(c)(2).
Agricultural and horticultural cooperatives. For this purpose, figure
taxable income without taking into
account any allowable deduction for
patronage dividends, per-unit retain
allocations, or nonpatronage
distributions.
Estates and trusts. See Line 11,
later, to figure adjusted gross income.
Unrelated business taxable income (UBTI). The allowable DPAD
of an organization taxed on its UBTI
under section 511 generally can't be
more than 9% of its UBTI figured
without the DPAD.

Form W-2 Wages

Your allowable DPAD generally can't
be more than 50% of the Form W-2
-8-

wages you paid to your employees
that are properly allocable to DPGR
(including Form W-2 wages allocated
to you on a Schedule K-1). If you
didn't pay Form W-2 wages, you
generally aren't allowed a DPAD.
However, you don't need Form W-2
wages to claim a DPAD you are
allocated as a:
• Patron of an agricultural or
horticultural cooperative, or
• Member of an expanded affiliated
group.
Note. When figuring your DPAD, the
limit equal to 50% of Form W-2 wages
is based only on Form W-2 wages
properly allocable to DPGR.
Form W-2 wages from an S corporation or partnership. S
corporations and partnerships that
meet specific requirements can
choose to figure Form W-2 wages at
the entity level and report the
allocated portion of Form W-2 wages
on Schedule K-1 to the S corporation
shareholder or partner who then
combines the allocated portion with
Form W-2 wages from other sources
on Form 8903 to determine the
DPAD.
If the S corporation or partnership
meets the requirements to be
classified as one of the eligible entities
listed below, it can figure Form W-2
wages at the entity level and allocate
Form W-2 wages to S corporation
shareholders or partners.
• Eligible small pass-through entity.
See S corporations and partnerships,
under Small Business Simplified
Overall Method, earlier, for the
requirements.
• Eligible widely held pass-through
entity. See S corporations and
partnerships, under Simplified
Deduction Method, earlier, for the
requirements.
• Eligible 861 partnership. See
Partnerships, under Section 861
Method, earlier, for the requirements.
Form W-2 wages from an estate or
trust. An estate or trust generally will
figure its Form W-2 wages and
apportion them between the
beneficiary and the fiduciary (and
among the beneficiaries) and report
each beneficiary's share on
Schedule K-1 (Form 1041).
Form W-2 wages for services performed in Puerto Rico. Taxpayers
that determine DPGR under section
Instructions for Form 8903 (Rev. 12-2019)

199(d)(8)(A), figure Form W-2 wages
by including wages paid for services
performed in Puerto Rico without
regard to section 3401(a)(8), but only
during the first 12 tax years of the
taxpayer that begin after 2005 and
before 2018.
Form W-2 wages paid to produce a
qualified film. Form W-2 wages
include compensation for services
performed in the United States by
actors, production personnel,
directors, and producers to produce a
qualified film. See Qualified Film,
earlier, for more information.

Figuring Form W-2 Wages Used
To Figure the 50% Limit

You figure Form W-2 wages used to
figure the 50% limit in two steps. First,
you must determine the amount of
wages to classify as Form W-2 wages
under Regulations section 1.199-2(e)
(1). Second, you must figure Form
W-2 wages that are properly allocable
to DPGR.
Step 1. Figuring Form W-2 Wages

You can use one of the following three
methods to figure your Form W-2
wages.
• Unmodified box method.
• Modified box 1 method.
• Tracking wages method.
After you figure Form W-2 wages,
see Step 2, later, to determine the
Form W-2 wages to report on line 16
of Form 8903.
Relevant Forms W-2. To figure your
Form W-2 wages, generally use the
sum of the amounts you properly
report for each employee on Form
W-2, Wage and Tax Statement, for
the calendar year ending with or
within your tax year. However, don't
use any amounts reported on a Form
W-2 filed with the Social Security
Administration more than 60 days
after its due date (including
extensions).
Short tax year. If you have a short
tax year, you generally will use the
sum of the amounts you properly
report for each employee on Form
W-2 for the calendar year ending with
or within that short tax year. However,
if you have a short tax year that
doesn't include a calendar year
ending within that short tax year, then
wages you properly report on Form
W-2 which you paid during the short
Instructions for Form 8903 (Rev. 12-2019)

tax year are treated as W-2 wages for
that short tax year.
Acquisition or disposition of a
trade or business. If you acquired or
disposed of a trade or business that
causes you and another employer to
pay W-2 wages to employees of the
acquired or disposed of trade or
business during the calendar year,
then the W-2 wages for the calendar
year of the acquisition or disposition
are allocated between each employer
based on the period that the
employees of the acquired or
disposed of trade or business were
employed by each employer. If you
have a short tax year that doesn’t
include a calendar year ending within
your short tax year, see Short tax
year, earlier.
Non-duplication rule. Amounts that
are treated as Form W-2 wages for a
tax year under any method can't be
treated as Form W-2 wages for any
other tax year. Also, an amount can't
be treated as Form W-2 wages by
more than one taxpayer.
Unmodified box method. Under the
unmodified box method, Form W-2
wages are the smaller of:
1. The sum of the amounts
reported in box 1 of the relevant
Forms W-2, or
2. The sum of the amounts
reported in box 5 of the relevant
Forms W-2.
Modified box 1 method. Under the
modified box 1 method, Form W-2
wages are figured as follows.
1. Add the amounts reported in
box 1 of the relevant Forms W-2.
2. Add all the amounts described
below and included in box 1 of the
relevant Forms W-2.
a. Amounts not considered wages
for federal income tax withholding
purposes.
b. Supplemental unemployment
compensation benefits.
c. Sick pay or annuity payments
from which the recipient requested
federal income tax withholding.
3. Subtract (2) from (1).
4. Add together any amounts
reported in box 12 of the relevant
Forms W-2 that are properly coded D,
E, F, G, or S.
5. Add (3) and (4).
-9-

Tracking wages method. Under the
tracking wages method, Form W-2
wages are figured as follows.
1. Add the amounts reported in
box 1 of the relevant Forms W-2 that
are also wages for federal income tax
withholding purposes.
2. Add any amounts reported in
box 1 of the relevant Forms W-2 that
are both:
a. Wages for federal income tax
withholding purposes, and
b. Supplemental unemployment
compensation benefits.
3. Subtract (2) from (1).
4. Add together any amounts
reported in box 12 of the relevant
Forms W-2 that are properly coded D,
E, F, G, or S.
5. Add (3) and (4).
Step 2. Form W-2 Wages
Allocable to DPGR
After you calculate Form W-2 wages,
as discussed in Step 1, you must
figure Form W-2 wages that are
properly allocable to DPGR. You
report the Form W-2 wages that are
properly allocable to DPGR on line 16
of Form 8903.
You can figure Form W-2 wages
that are properly allocable to DPGR
under one of the following methods.
• Small business simplified overall
method safe harbor.
• Wage expense safe harbor.
• Any other reasonable method
based on all the facts and
circumstances.
Small business simplified overall
method safe harbor. If you use the
small business simplified overall
method to allocate costs between
DPGR and non-DPGR (see Small
Business Simplified Overall Method,
earlier), you can use the small
business simplified overall method
safe harbor to determine the amount
of Form W-2 wages allocable to
DPGR. Under this safe harbor
method, the amount of Form W-2
wages that is properly allocable to
DPGR equals the proportion of DPGR
to total gross receipts.
Wage expense safe harbor. If you
are using either the section 861
method of cost allocation under
Regulations section 1.199-4(d) or the
simplified deduction method under

Regulations section 1.199-4(e), you
determine the amount of wages
properly allocable to DPGR by
multiplying the amount of wages for
the tax year by the ratio of your wage
expense included in calculating QPAI
for the tax year to your total wage
expense used in calculating your
taxable income (or adjusted gross
income) for the tax year without
regard to any wage expenses
disallowed by sections 465, 469,
704(d), or 1366(d).
If you use the section 861 method
or the simplified deduction method,
you must use the same expense
allocation and apportionment
methods that you use to determine
QPAI to allocate and apportion wage
expense for purposes of the safe
harbor.
Wage expense included in cost
of goods sold. When figuring the
ratio of your wage expense included
in calculating QPAI for the tax year to
your total wage expense used in
calculating your adjusted gross
income or taxable income (as the
case may be) for the tax year,
determine the wage expense included
in cost of goods sold using any
reasonable method based on all of the
facts and circumstances. For
example, it may be reasonable to use
(a) the amount of direct labor included
in cost of goods sold or (b) section
263A labor costs (as defined in
Regulations section 1.263A-1(h)(4)
(ii)) included in cost of goods sold.
More information. For more
information on figuring your Form W-2
wages, see Regulations section
1.199-2 and Rev. Proc. 2006-47. You
can find Rev. Proc. 2006-47 on
page 869 of I.R.B. 2006-45 at
IRS.gov/pub/irs-irbs/irb06-45.pdf.
For more information on figuring
Form W-2 wages properly allocable to
DPGR, see Regulations section
1.199-2(e)(2).

Specific Instructions
Complete lines 1 through 10,
column (a), only if you have
CAUTION oil-related production
activities. All others, do not complete
lines 1 through 9, column (a), and
enter zero on line 10a.

!

Enter amounts for all activities
(including oil-related production

activities) on lines 1 through 10,
column (b).

Line 1
Domestic Production
Gross Receipts (DPGR)

Enter your DPGR (defined earlier in
the General Instructions under
Domestic Production Gross
Receipts).

Line 2
Allocable Cost of Goods
Sold

Enter your cost of goods sold
allocable to DPGR on line 2 unless
you are using the small business
simplified overall method. If you are
using the small business simplified
overall method, skip line 2, and go to
Line 4.
For more information about
allocating costs of goods sold, see
Cost of Goods Sold, earlier, in the
General Instructions. See Small
Business Simplified Overall Method,
earlier in the General Instructions, for
more information about using this
method to allocate cost of goods sold
and other deductions or losses to
DPGR.

Line 3
Allocable Deductions and
Losses

Enter your other deductions or losses
properly allocable to DPGR on line 3
unless you are using the small
business simplified overall method. If
you are using the small business
simplified overall method, skip line 3,
and go to Line 4.
If you are using the simplified
deduction method, enter on line 3 the
other deductions or losses you ratably
apportion to DPGR. See Simplified
Deduction Method, earlier in the
General Instructions, for more
information about this method.

If you are using the section 861
method, enter on line 3 the other
deductions or losses you allocate or
apportion to DPGR. See Section 861
Method, earlier in the General
Instructions, for more information
about this method.
Oil-related production activities. If
you use the simplified deduction
method to calculate the other
deductions or losses reported on
-10-

line 3, column (b), you must make an
additional calculation to determine the
amount to report on line 3, column (a).
Multiply the amount reported on line 3,
column (b), by the ratio of oil-related
DPGR reported on line 1, column (a),
divided by DPGR from all activities
reported on line 1, column (b). Enter
the result on line 3, column (a). Don't
reduce the amount reported on line 3,
column (b), by this amount.
If you use the section 861 method,
apply the rules of section 861 to
determine the amount to report on
line 3, column (a).

Line 4
Small Business Simplified
Overall Method

Enter the amount of cost of goods
sold and other deductions or losses
you ratably apportion to DPGR using
the small business simplified overall
method.

Oil-related production activities. If
you use the small business simplified
overall method to calculate the cost of
goods sold and other deductions,
expenses, and losses reported on
line 4, column (b), you must make an
additional calculation to determine the
amount to report on line 4, column (a).
Multiply the amount reported on line 4,
column (b), by the ratio of oil-related
DPGR reported on line 1, column (a),
divided by DPGR from all activities
reported on line 1, column (b). Enter
the amount on line 4, column (a).
Don't reduce the amount reported on
line 4, column (b), by this amount.

Line 7

Beneficiaries of estates and trusts,
partners, and S corporation
shareholders report the QPAI
distributed from estates or trusts, and
certain partnerships or S corporations
on line 7. The QPAI should be
reported to you on Schedule K-1 for
Forms 1041, 1065, or 1120S. See the
related Schedule K-1 and its
instructions for more information.

Line 9

Estates and trusts must use
Regulations section 1.652(b)-3 to
allocate QPAI to beneficiaries if DNI is
distributed or required to be
distributed to beneficiaries. Report the
amount of QPAI allocated to
beneficiaries on line 9. See Estates

Instructions for Form 8903 (Rev. 12-2019)

and trusts, earlier under Definitions
and Special Rules.

Line 10a Oil-Related
Qualified Production
Activities Income

Add lines 1 through 9, column (a), to
determine oil-related QPAI. If you
don't have oil-related QPAI, don't
complete lines 1 through 9, column
(a), and enter zero on line 10a.

Line 11
Income Limitation
Individuals. Enter your adjusted
gross income from line 7 of Form
1040 figured without the DPAD.
Olympic and Paralympic medals
and USOC prize money. For
purposes of figuring your DPAD, your
adjusted gross income doesn't
include the value of any medal
awarded in, or any prize money
received from the United States
Olympic Committee on account of
competition in the Olympic Games or
Paralympic Games. If line 7 of your
Form 1040 includes these amounts,
then reduce your adjusted gross
income by them before entering it on
line 11.
Corporations. Enter your taxable
income from the applicable line of
your tax return (for example, line 30 of
Form 1120) figured without the DPAD.
Members of EAGs. See Line 24,
later.
Agricultural and horticultural cooperatives. Enter your taxable
income figured without the DPAD or
the deductions for patronage
dividends, per-unit retain allocations,
and nonpatronage distributions under
section 1382(b) or (c).
Estates and trusts. Enter your
adjusted gross income figured without
the DPAD. See the Instructions for
Form 1041 to figure adjusted gross
income. Use the method discussed
under How to figure AGI for estates
and trusts, under Line 15a–Other
Deductions.
Unrelated business taxable income (UBTI). An organization taxed
on its UBTI under section 511 enters
its UBTI from line 38 of Form 990-T
figured without the DPAD.

Instructions for Form 8903 (Rev. 12-2019)

Note. If you have extraterritorial
income (ETI), figure taxable income
without regard to any claimed ETI
exclusions.
See Regulations section 1.199-1(b)
(1) for more information.

Line 14a

If you have oil-related qualified
production income, use line 14a to
determine the least of the following
amounts.
• Oil-related QPAI—line 10a,
• QPAI—line 10b, or
• Adjusted gross income for an
individual, estate, or trust (taxable
income for all other
taxpayers)—line 11.
All others, enter zero on line 14a.

Line 14b Reduction for
Oil-Related Qualified
Production Activities
Income

If you have oil-related qualified
production income, use line 14b to
reduce your DPAD by 3% of the
amount reported on line 14a.
All others, enter zero on line 14b.

Line 16
Form W-2 Wages

Enter your Form W-2 wages that are
properly allocable to DPGR
(discussed earlier under Form W-2
Wages). Don't include Form W-2
wages you must report on line 17.

Line 17

Beneficiaries of estates and trusts,
partners, and S corporation
shareholders report the Form W-2
wages distributed from estates or
trusts, and certain partnerships or S
corporations on line 17. The Form
W-2 wages should be reported to you
on the Schedule K-1 for Forms 1041,
1065, or 1120S. See the related
Schedule K-1 and its instructions for
more information.

Line 19

Estates and trusts must use
Regulations section 1.652(b)-3 to
allocate Form W-2 wages to
beneficiaries if DNI is distributed or
required to be distributed to
beneficiaries. Report the amount of
the Form W-2 wages allocated to
beneficiaries on line 19. See Estates
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and trusts, earlier under Definitions
and Special Rules.

Line 24
Expanded Affiliated Group
Allocation
These instructions explain how
expanded affiliated groups (EAGs)
(defined earlier under Definitions and
Special Rules) figure and report the
DPAD. Certain members of an EAG
may not be required to complete the
entire Form 8903. See How To
Report, later.

Computation of the EAG's
DPAD

In general, the DPAD for an EAG is
determined by aggregating each
member's taxable income or loss,
QPAI, and Form W-2 wages. A
member's QPAI may be positive or
negative. Also, a member's taxable
income or loss and QPAI are
determined under the member's
method of accounting.

Members with different tax years.
If members of an EAG have different
tax years, in determining the DPAD of
a member, the reporting member
must take into account the taxable
income or loss, QPAI, and Form W-2
wages of each group member that are
both:
• Attributable to the period that the
member of the EAG and the reporting
member are both members of the
EAG, and
• Taken into account in a tax year
that ends with or within the tax year of
the reporting member with respect to
which the DPAD is figured.
For an example that explains the
above requirements, see Regulations
section 1.199-7.
Net operating losses. The net
operating loss (NOL) of a member of
an EAG that is used in the
computation of the EAG's taxable
income isn't treated as an NOL
carryback or carryover to determine
the taxable income limitation in a prior
or subsequent year for purposes of
section 199(a)(1)(B). See Regulations
section 1.199-7(b)(4) for more
information.

Allocation of the DPAD to
Members of the EAG

The EAG's DPAD is allocated among
members of the EAG based on the
ratio of each member's QPAI to the

total QPAI of the EAG. The allocation
is made regardless of whether the
EAG member has taxable income or
loss or Form W-2 wages for the tax
year. If a member has negative QPAI,
that member's QPAI is treated as zero
for purposes of the allocation.

method, a consolidated group
determines its QPAI by reference to
its members' DPGR, non-DPGR, cost
of goods sold, and all other
deductions, expenses, or losses,
determined on a consolidated basis.

Consolidated Groups

All members of an EAG are treated as
a single corporation for purposes of
determining the DPAD. However, the
DPAD is allocated to each member.

Under section 199, a consolidated
group is treated as a single member of
the EAG. If all members of an EAG
are members of the same
consolidated group, the DPAD of the
consolidated group is determined
based on the consolidated taxable
income or loss, QPAI, and Form W-2
wages of the group and not the
separate taxable income or loss,
QPAI, and Form W-2 wages of its
members. The consolidated group will
generally file only one Form 8903. For
details, see Regulations section
1.199-7.

If an EAG includes both
consolidated and non-consolidated
members, the consolidated (not
separate) taxable income or loss,
QPAI, and Form W-2 wages of the
consolidated group are aggregated
with the taxable income or loss, QPAI,
and Form W-2 wages of the
non-consolidated group members to
determine the DPAD. For details, see
Regulations section 1.199-7(d)(4).
A consolidated group's DPAD (or
the DPAD allocated to a consolidated
group that is a member of an EAG) is
allocated to the members of the
consolidated group in proportion to
each member's QPAI, if any,
regardless of whether the
consolidated group member has:
• Separate taxable income or loss for
the tax year, and
• Form W-2 wages for the tax year.
For purposes of allocating the
DPAD of a consolidated group among
its members, any redetermination of a
corporation's receipts, cost of goods
sold, or other deductions from an
intercompany transaction described in
Regulations section 1.1502-13(c)(1)(i)
or (c)(4) isn't taken into account, and if
a consolidated group member has
negative QPAI, the member's QPAI is
treated as zero.
Simplified deduction and small
business simplified overall methods. For purposes of applying the
simplified deduction method and the
small business simplified overall

How To Report

EAG reporting member. The EAG
chooses a reporting member from
amongst all members of the EAG with
the same tax year to figure the DPAD
for all EAG members (computing
members). The reporting member
completes lines 10a through 16 and
lines 18 through 22 of the Form 8903
for the group.
The reporting member also does
the following.
1. Enters the portion of the
deduction allocated to the other
members of the EAG (including
non-computing members) as a
negative number on line 24.
2. Completes lines 23 and 25.
3. Attaches a schedule showing
how the reporting member figured its
own QPAI.
4. Attaches a schedule that shows
how the DPAD was figured for the
group and each member's name, EIN,
and share of the DPAD.
5. Provides a copy of the group
DPAD computation schedule to the
other computing members of the
group.
EAG computing member other
than the reporting member. An
EAG computing member other than
the reporting member does the
following.
1. Completes a separate Form
8903, skips lines 1–22, and enters its
share of the group deduction on
line 24 as a positive number.
2. Completes lines 23 and 25.
3. Attaches a schedule showing
how the computing member figured its
own QPAI.
4. Attaches a copy of the group
DPAD computation schedule
provided by the reporting member.
Consolidated groups. If the EAG is
comprised of a single consolidated
group, the common parent of the
-12-

consolidated group completes lines 1
through 25 for the group. If the EAG is
comprised of more than just the
members of a single consolidated
group, the common parent files a
Form 8903 for the consolidated group
as either the reporting member or as
an EAG member other than the
reporting member, whichever is
appropriate. In all events, the common
parent attaches a schedule that
shows the amount of the consolidated
group's DPAD allocated to each
member of the consolidated group,
and how the allocated amount was
calculated.

Line 25
Domestic Production
Activities Deduction

Combine lines 22 through 24 and
enter the result on line 25. For Form
1040 returns filed after tax year 2017,
include the result from line 25 of Form
8903 on Schedule 1 (Form 1040),
line 36. For Form 1120 returns filed
after tax year 2017, enter the result
from line 25 of Form 8903 on line 26,
Other deductions.
For tax years beginning after
December 31, 2017, additional
guidance under section 199A(g) is
pending.

Agricultural and Horticultural
Cooperatives

Reduce the amount the cooperative
deducts under section 1382 by the
portion of the cooperative's DPAD
allocated to its patrons. However, the
entire amount on line 25, which
includes any amount allocated to
patrons, is deductible under section
199 by the cooperative. See
Agricultural and horticultural
cooperatives in the General
Instructions for more information on
this subject.
How to report. Cooperatives aren't
permitted to net patronage losses with
nonpatronage income. Therefore,
they must figure taxable income from
patronage or nonpatronage activities
separately on Schedule G, Form
1120-C.
Patronage income and
deductions only. Cooperatives that
have only patronage income and
deductions generally complete Form
8903 as described earlier in the
instructions.
Instructions for Form 8903 (Rev. 12-2019)

Patronage and nonpatronage
income and deductions. For tax
years beginning before January 1,
2018, cooperatives with both
patronage and nonpatronage income
or deductions must follow the
instructions below for completing
Form 8903.

Instructions for Form 8903 (Rev. 12-2019)

Report the total amount of the
DPAD to be claimed on Form 1120-C
on line 25 of Form 8903, and leave
lines 1 through 24 blank. Attach to
Form 8903 separate calculations of
the DPAD from patronage and
nonpatronage activities, which

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conform to lines 1 through 24 of Form
8903.
Enter the DPAD from patronage
and nonpatronage sources reported
on the attachment on line 6a, column
(a), Patronage, and line 6a, column
(b), Nonpatronage, respectively, of
Schedule G, Form 1120-C.

Paperwork Reduction Act Notice. We ask for the information on this form to carry out the Internal Revenue laws of the
United States. You are required to give us the information. We need it to ensure that you are complying with these laws
and to allow us to figure and collect the right amount of tax.
You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act
unless the form displays a valid OMB control number. Books or records relating to a form or its instructions must be
retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax
returns and return information are confidential, as required by section 6103.
The time needed to complete and file this form will vary depending on individual circumstances. The estimated burden
for individual taxpayers filing this form is approved under OMB control number 1545-0074 and is included in the
estimates shown in the instructions for their individual income tax return. The estimated burden for all other taxpayers
who file this form is shown below:
Recordkeeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Learning about the law or the form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preparing, copying, assembling, and sending the form to the IRS . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 hr., 58 min.
7 hr., 33 min.
7 hr., 58 min.

If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler,
we would be happy to hear from you. See the instructions for the tax return with which this form is filed.

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Instructions for Form 8903 (Rev. 12-2019)