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Department of the Treasury
Internal Revenue Service
Instructions for Form 8903

(Rev. December 2019)
Domestic Production Activities Deduction

Section references are to the Internal share of the cooperative's DPAD to
Revenue Code unless otherwise noted. General Instructions include on Form 8903.

Future Developments Purpose of Form Married individuals filing a joint
Use Form 8903 to figure your income tax return figure the deduction
For the latest information about on one Form 8903 using the
domestic production activities
developments related to Form 8903 applicable items of both spouses.
deduction (DPAD).
and its instructions, such as
legislation enacted after they were Your DPAD is generally 9% of the Note. Unless you were allocated a
published, go to IRS.gov/Form8903. smaller of: share of a cooperative's DPAD or you
Future revisions of Form 8903. 1. Your qualified production are a member of an expanded
The IRS will revise the December activities income (QPAI), or affiliated group (EAG), you won't be
2018 version of Form 8903 only when 2. Your adjusted gross income for allowed a DPAD unless you can enter
necessary. Continue to use the 2018 an individual, estate, or trust (taxable on Form 8903 a positive amount for all
version of Form 8903 for tax years income for all other taxpayers) figured three of the following.
beginning after 2017 until a new without the DPAD. • Qualified production activities
revision is issued. income (QPAI).
Reduced DPAD for oil-related • Adjusted gross income for an
What's New QPAI. A taxpayer with oil-related individual, estate, or trust (taxable
QPAI also must reduce the DPAD by income for all other taxpayers).
Domestic production activities de- 3% of the least of the following • Form W-2 wages you paid to your
duction (DPAD). DPAD under amounts. employees. If you didn't pay any Form
former section 199 has been repealed • Oil-related QPAI. W-2 wages (or have Form W-2 wages
for tax years beginning after 2017. • QPAI. allocated to you on a Schedule K-1),
Taxpayers using Form 8903 to • Adjusted gross income for an you can't claim a DPAD.
compute DPAD for tax years, or items individual, estate, or trust (taxable
arising from tax years, prior to repeal income for all other taxpayers) figured For details, see the discussions of
should use the Instructions for Form without DPAD. these three items, later.
8903 dated December 2018. DPAD for income attributable to
DPAD limited to wages paid. Your
For specified agricultural or domestic production activities af-
DPAD generally can't be more than
horticultural cooperatives (specified ter 2017. DPAD has been repealed
50% of the Form W-2 wages you paid
cooperatives), a deduction under for tax years beginning after 2017.
to your employees that are properly
section 199A(g) for income Don’t use Form 8903 to claim DPAD
allocable to domestic production
attributable to domestic production for 2018 or later years unless:
gross receipts (including Form W-2
activities is available for tax years 1. Your tax year began before
wages allocated to you on a
beginning after 2017. Specified January 1, 2018,
Schedule K-1).
cooperatives may use Form 8903, as
applicable, to calculate the section 2. You are a shareholder in an S
Who Must File
199A(g) deduction. corporation or partner in a partnership
For further guidance, until final DPAD for income attributable to and the entity has a tax year that
regulations are published in the domestic production activities be- began before January 1, 2018,
Federal Register, taxpayers may fore 2018. Individuals, corporations, 3. You are a beneficiary of an
generally rely on the Proposed cooperatives, estates, and trusts use estate or trust and the estate or trust
Regulations (REG-118425-18), Form 8903 to figure their allowable has a tax year that began before
published June 19, 2019, provided DPAD from certain trade or business January 1, 2018,
the taxpayer applies the rules in their activities. 4. You are a patron of an
entirety and in a consistent manner. Shareholders of S corporations and agricultural or horticultural cooperative
For purposes of the W-2 Wage partners include information provided with a tax year that began before
Limitation, also see Notice 2019-27, by the S corporation or partnership January 1, 2018.
2019-31 IRB, page 484 available at when figuring their allowable DPAD.
IRS.gov/IRB/2019-31. Beneficiaries of an estate or trust Specified cooperatives’ DPAD af-
include information provided by the ter 2017. For tax years beginning on
estate or trust when figuring their or after January 1, 2018, specified
allowable DPAD. Patrons of certain agricultural or horticultural
agricultural or horticultural cooperatives to which part I of
cooperatives may be allocated a subchapter T applies may qualify for a
deduction under section 199A(g).

Dec 20, 2019 Cat. No. 39878Q

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For agricultural or horticultural corporations and partnerships can An agricultural or horticultural
cooperatives’ utilizing Form 8903 to figure QPAI and Form W-2 wages at cooperative is an organization
compute a deduction under section the entity level and allocate and report described in section 1381 that is
199A(g), write “SPECIFIED these amounts to shareholders and engaged in:
COOPERATIVE DPAD” across the partners. See Qualified Production • Manufacturing, producing, growing,
top of Form 8903. The Form 8903 Activities Income (QPAI) and Form or extracting (MPGE) in whole or
must be attached to the cooperative’s W-2 Wages for more information. significant part any agricultural or
return. All other S corporations and horticultural product, or
partnerships need to provide each • Marketing agricultural or
Definitions and Special shareholder or partner with horticultural products that its patrons
Rules information the shareholder or partner have MPGE.
needs to figure the DPAD. Agricultural or horticultural products
Trade or business. QPAI and Form for this purpose include fertilizer,
W-2 wages are figured by only taking Film production. S corporation diesel fuel, and other supplies used in
into account items that are attributable shareholders or partners that own agricultural or horticultural production.
to the actual conduct of a trade or 20% or more (directly or indirectly) of An organization engaged in marketing
business. An activity qualifies as a the capital interests in the S agricultural or horticultural products is
trade or business if your primary corporation or the partnership are treated as having MPGE in whole or in
purpose for engaging in the activity is treated as having engaged directly in significant part any qualifying
for income or profit and you are any film produced by the S production property marketed by the
involved in the activity with continuity corporation or partnership, and the S organization that its patrons have
and regularity. For example, a corporation or partnership is treated MPGE.
sporadic activity or a hobby doesn't as having engaged directly in any film
qualify as a trade or business. produced by the S corporation Allocation of cooperative DPAD.
Coordination with other deduc- shareholder or partner. See section Qualified payments are the patronage
tions. Expenses that otherwise 199(d)(1)(A)(iv) for more information. dividends and per-unit retain
allocations paid to patrons on which
would be taken into account for Estates and trusts. Generally, an the cooperative computed its DPAD.
purposes of figuring the DPAD are estate or trust will figure its: A patron who receives a qualified
only taken into account if and to the • QPAI (which may be less than payment can be allocated any portion
extent the losses and deductions from zero), and of the DPAD allowed with respect to
all of your activities aren't disallowed • Form W-2 wages it paid to its the portion of the QPAI to which such
by a provision of the Internal Revenue employees (including Form W-2 payment is attributable. The
Code, including the following. wages allocated to it on a cooperative must identify the portion
• Basis limits on a partner's share of Schedule K-1). of its DPAD allocated to a patron in a
partnership losses. These items are then allocated among written notice mailed to the patron no
• Basis limits on a shareholder's the estate or trust and its beneficiaries later than the 15th day of the 9th
share of S corporation losses. based on the relative proportion of the month following the close of the
• At-risk rules. estate's or trust's distributable net cooperative's tax year. The qualified
• Passive activity rules. income (DNI) for the tax year that is payments and allocated DPAD will
If only a portion of your losses or distributed or required to be also be reported to patrons that aren't
deductions are allowed in the current distributed to the beneficiary or corporations on Form 1099-PATR,
tax year, a proportionate share of the retained by the estate or trust. If the Taxable Distributions Received From
losses or deductions that reflect estate or trust has no DNI for the tax Cooperatives.
expenses allocated to your gross year, QPAI and Form W-2 wages are
receipts from qualified production allocated entirely to the estate or trust. Note. For purposes of section 199,
activities, after applying the provisions Although estates and trusts actually patrons of agricultural or horticultural
discussed earlier, is taken into allocate their QPAI and Form W-2 cooperatives can't include any
account for purposes of figuring the wages to beneficiaries as discussed distributions of qualified payments
DPAD for the current tax year. If any earlier, when completing Form 8903 from the cooperative in the
of the losses or deductions disallowed they must reduce the amounts computation of their DPAD.
for tax years beginning after 2004 are reported on lines 8 and 18 to reflect Allocation of patronage and
allowed in a later tax year, a the portion of those amounts that nonpatronage income and
proportionate share of the expenses were allocated to beneficiaries as deductions. Cooperatives must
reflected in those losses or QPAI or Form W-2 wages. For details, calculate the DPAD separately to
deductions is taken into account in see Line 9, later. determine patronage and
figuring the DPAD in the later tax year. nonpatronage income or losses for
Agricultural and horticultural co-
A net operating loss under section operatives. Generally, an purposes of determining unused
172 generally is figured without the agricultural or horticultural cooperative patronage or nonpatronage losses on
section 199 deduction. can choose to allocate all, some, or lines 12 and 13, respectively, of
S corporations and partnerships. none of its allowable DPAD (but not Schedule G, Form 1120-C.
The DPAD is applied at the QPAI) to its patrons. If you have only patronage income
shareholder or partner level. Certain S and deductions, complete the Form

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8903 as described in the instructions. can find Rev. Proc. 2011-42 on greases, and waxes, and residues
However, if you have both patronage page 318 of I.R.B. 2011-37 at such as fuel oil.
and nonpatronage income and IRS.gov/pub/irs-irbs/irb11-37.pdf.
Primary products from gas.
deductions, see Line 25 before
Primary products from gas are all gas
completing Form 8903. Qualified Production
and associated hydrocarbon
Expanded affiliated groups Activities Income (QPAI) components from gas or oil wells,
(EAGs). All members of an EAG are Your allowable DPAD generally can't whether recovered at the lease or
treated as a single corporation to be more than 9% of your QPAI. If you upon further processing, including
figure their DPAD. The DPAD is don't have QPAI, you generally aren't natural gas; condensates; liquefied
allocated among the members of the allowed a DPAD. However, you don't petroleum gases such as ethane,
group in proportion to each member's need QPAI to claim a DPAD you are propane, and butane; and liquid
respective amount (if any) of QPAI. allocated as a patron of an agricultural products such as natural gasoline.
See Line 24 before completing Form or horticultural cooperative. See Temporary Regulations
8903. Figuring QPAI. QPAI is the excess section 1.927(a)-1T(g)(2) for
An EAG is an affiliated group as (if any) of: additional information.
defined in section 1504(a) 1. Domestic production gross S corporations and partnerships.
determined: receipts (DPGR), over S corporations and partnerships that
• By substituting "more than 50%" for
"at least 80%" each place it appears, 2. The sum of: meet specific requirements can
and a. Cost of goods sold allocable to choose to figure QPAI at the entity
• Without regard to paragraphs (2) DPGR, and level and allocate QPAI to
shareholders or partners. The
and (4) of section 1504(b). b. Other expenses, losses, or shareholder or partner then combines
A corporation's status as a member deductions (other than the DPAD) the allocated portion with QPAI from
of an EAG is determined on a daily which are properly allocable to DPGR. other sources on Form 8903 to
basis. Also, if a corporation joins or determine the DPAD. S corporations
leaves an EAG, its status as a Oil-related QPAI. A taxpayer with
or partnerships that aren't eligible to
member of the EAG is determined at oil-related QPAI must reduce the
figure QPAI at the entity level must
the end of the day on which it joins or DPAD by 3% of the least of the
report each shareholder's or partner's
leaves the EAG. following amounts.
share of deductions, expenses, or
• Oil-related QPAI.
If all the capital and profits interests losses on Schedule K-1 with other
• QPAI.
of a partnership are owned by information the shareholder or partner
• Adjusted gross income for an
members of a single EAG at all times needs to figure their DPAD.
individual, estate, or trust (taxable
during the partnership's tax year, the QPAI from an estate or trust. An
income for all other taxpayers) figured
partnership and all members of the
without the DPAD. estate or trust will figure its QPAI and
group are treated as a single taxpayer
to figure their domestic production Oil-related QPAI is QPAI report each beneficiary's share on
gross receipts (DPGR) for that tax attributable to the production, refining, Schedule K-1 (Form 1041).
year. processing, transportation, or Cooperatives. Cooperatives figure
distribution of oil or gas, or any QPAI without any deduction for
Alternative minimum tax (AMT). primary product from oil or gas (as patronage dividends, per-unit retain
For taxpayers other than corporations, used in section 927(a)(2)(C) before its allocations, or nonpatronage
the DPAD used to determine regular repeal). distributions under section 1382(b) or
tax is also used to determine
alternative minimum taxable income Costs related to transportation. (c).
(AMTI). Corporations use AMTI When figuring QPAI and oil-related Domestic Production Gross
(instead of taxable income) figured QPAI for tax years beginning after Receipts (DPGR)
without the DPAD to figure the 2015, only 25% of properly allocated
alternative minimum DPAD used to costs related to the transportation of Using any reasonable method that is
determine AMTI. oil are allocable to DPGR if the satisfactory to the Secretary based on
taxpayer is in the trade or business of the facts and circumstances, you
For details on how corporations must determine whether gross
refining crude oil and is not a major
figure DPAD for AMT, see the receipts qualify as DPGR on an
integrated oil company (as defined in
Instructions for Form 4626. item-by-item basis (and not, for
section 167(h)(5)(B) without regard to
Statistical sampling. You are clause (iii)). example, on a division-by-division,
generally allowed to use statistical product line-by-product line, or
sampling for purposes of calculating Primary products from oil. transaction-by-transaction basis);
the DPAD. For details about Primary products from oil are oil and however, see Regulations section
acceptable statistical sampling all products derived from the 1.199-3(d)(2) for special rules and
methodologies, see Rev. Proc. destructive distillation of oil, including Regulations section 1.199-(3)(d)(3)
2007-35 and Rev. Proc. 2011-42. You volatile products, light oils such as for an exception. See Regulations
can find Rev. Proc. 2007-35 on motor fuel and kerosene, distillates section 1.199-(3)(d)(4) for examples.
page 1349 of I.R.B. 2007-23 at such as naphtha, lubricating oils,
DPGR activities. Generally, your
IRS.gov/pub/irs-irbs/irb07-23.pdf. You gross receipts (defined later) derived

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from the following activities are States and over which the United EAG partnerships. A partnership is
DPGR. States has exclusive rights, in an EAG partnership if a single EAG
1. Construction of real property accordance with international law, owns all the interests in the capital
you perform in the United States in with respect to the exploration and and profits of the partnership at all
your construction trade or business. exploitation of natural resources. The times during the tax year. If the
United States does not include
2. Engineering or architectural requirements are met, the EAG
possessions and territories of the
services you perform in the United partnership and all members of the
United States or the airspace or space
States in your engineering or EAG are treated as a single taxpayer
over the United States and these
architectural services trade or for purposes of determining the
areas.
business for the construction of real amount of domestic production gross
property in the United States. Activities in Puerto Rico. For receipts (DPGR).
3. Any lease, rental, license, sale, purposes of determining DPGR, the Special rules apply to the
exchange, or other disposition of the United States includes Puerto Rico for attribution of gross receipts (a) to a
following. a taxpayer who has gross receipts member of the EAG from the
from sources within Puerto Rico that disposition of property an EAG
a. Qualifying production property
are subject to tax under sections 1 or partnership engaged in MPGE, and
you manufacture, produce, grow, or
11, but only for the first 12 tax years of (b) to an EAG partnership from the
extract in whole or in significant part in
the taxpayer that begin after 2005 and disposition of property another EAG
the United States. See Qualifying
before 2018. partnership engaged in MPGE, both
Production Property and
of which are members of the same
Manufacturing, producing, growing, or Gross receipts. Your gross receipts
EAG. See Regulations section
extracting, later, for details. are receipts that are recognized under
1.199-3(i)(8) for more information,
b. Any qualified film you produce. your method of accounting for the tax
exceptions, and other rules.
year. Gross receipts include the
c. Electricity, natural gas, or following amounts from your trade or
potable water you produce in the business activities. Qualifying Production Property
United States. Total sales (net of returns and The following are qualifying
•
In general, gross receipts derived allowances). production property.
from the following activities aren't • Amounts received for services, not • Tangible personal property.
DPGR. including wages received as an • Computer software.
• Activities not attributable to the employee. • Sound recordings.
actual conduct of a trade or business. • Income from investments and from
Tangible personal property.
• The sale of food and beverages you incidental or outside sources Tangible personal property includes
prepare at a retail establishment. (including sales of business property).
any tangible property other than land,
• The lease, rental, or license of • Amounts received that are allocable
buildings (including structural
property between certain persons to the payment of sales tax or other
components), computer software,
treated as a single employer. similar state and local taxes if the tax
sound recordings, qualified films,
• The lease, rental, license, sale, is legally imposed on you.
electricity, natural gas, or potable
exchange, or other disposition of land. Gross receipts are generally not water. Tangible personal property
• The transmission or distribution of reduced by the: also includes any gas (other than
electricity, natural gas, or potable • Cost of goods sold, or natural gas), chemical, and similar
water. • Adjusted basis of property (other property, such as steam, oxygen,
• Advertising and product-placement; than capital assets) sold or otherwise hydrogen, or nitrogen.
however, see Regulations section disposed of if such property is
Machinery, printing presses,
1.199-3(i)(5)(ii) for exceptions. described in section 1221(a)(1)
transportation and office equipment,
• Customer and technical support, through (5).
telephone and other refrigerators, grocery counters, testing
Allocation of gross receipts. You
telecommunications services, online equipment, display racks and shelves,
services (including Internet access generally must allocate your gross and neon and other signs that are
receipts between DPGR and
services, online banking services, and contained in or attached to a building
providing access to online electronic non-DPGR. Allocate gross receipts constitute tangible personal property.
using a reasonable method that
books, newspapers, and journals), Note. Local law doesn't control
and other similar services; however, accurately identifies gross receipts
that are DPGR. However, if less than whether property is tangible personal
see Regulations section 1.199-3(i)(6) property.
(iii) for exceptions. 5% of your gross receipts are
non-DPGR, you can treat all of your See Regulations section 1.199-3(j)
Activities in the United States. gross receipts as DPGR. Also, if less (2) for more information.
For purposes of determining DPGR, than 5% of your gross receipts are
the United States includes the 50 DPGR, you can treat all of your gross Computer software. In general,
states, the District of Columbia, the receipts as non-DPGR. computer software includes the
following.
territorial waters of the United States, For details, see Regulations • Any program, routine, or sequence
and the seabed and subsoil of those section 1.199-1(d). of machine-readable code that is
submarine areas that are adjacent to
the territorial waters of the United designed to cause a computer to

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perform a desired function or set of then the medium is considered extracting the property they receive as
functions, and the documentation tangible personal property. a distribution from the partnership. For
required to describe or maintain that purposes of section 199, a qualifying
Exception. Sound recordings
program or routine. An electronic in-kind partnership is a partnership
don't include the creation of
book online or for download doesn't engaged in any of the following
copyrighted material in a form other
constitute computer software. activities.
than a sound recording, such as lyrics
• Machine-readable code for (a) • The extraction, refining, or
or music composition.
video games or similar programs, (b) processing of oil, natural gas (as
equipment that is an integral part of See Regulations section 1.199-3(j) described in Regulations section
other property, and (c) typewriters, (4) for more information. 1.199-3(l)(2)), petrochemicals, or
calculators, adding and accounting Manufacturing, producing, grow- products derived from oil, natural gas,
machines, copiers, duplicating ing, or extracting (MPGE). MPGE or petrochemicals, in whole or
equipment, and similar equipment, generally include the following trade significant part within the United
even if the program isn't designed to or business activities. States.
operate on a computer as defined in • Activities related to manufacturing, • The production or generation of
section 168(i)(2)(B). producing, growing, extracting, electricity in the United States.
• Computer programs of all classes, installing, developing, improving, and • The extraction and processing of
including operating systems, creating qualifying production minerals (as defined in Regulations
executive systems, monitors, property. section 1.611-1(d)(5)) within the
compilers and translators, assembly • Making qualifying production United States.
routines, utility programs, and property (QPP) out of scrap, salvage, • Any other industry or activity
application programs. or junk material, or from new or raw designated as an industry or activity of
• Any incidental and ancillary rights material by processing, manipulating, a qualifying in-kind partnership by
that are necessary for the acquisition refining, or changing the form of an publication in the Internal Revenue
of the title to, the ownership of, or the article, or by combining or assembling Bulletin.
right to use computer software, and two or more articles. For more information on qualifying
that are used only in connection with • Cultivating soil, raising livestock, in-kind partnerships, see Regulations
that specific software. These fishing, and mining minerals. sections 1.199-3(i)(7). For qualifying
incidental and ancillary rights aren't • Storage, handling, or other in-kind partnerships engaged solely in
included in the definition of a processing activities (other than the extraction and processing of
trademark or trade name under transportation activities) in the United minerals, see Rev. Rul. 2007-30 on
Regulations section 1.197-2(b)(10)(i). States related to the sale, exchange, page 1277 of I.R.B. 2007-21 at
Exception. Computer software or other disposition of agricultural IRS.gov/pub/irs-irbs/irb07-21.pdf.
doesn't include any data or products, provided the products are
information base unless the data or consumed in connection with, or Qualified Film
information base is in the public incorporated into, manufacturing,
A qualified film is any motion picture
domain and is incidental to a producing, growing, or extracting
film, video tape, or live or delayed
computer program. QPP, whether or not by the taxpayer.
television programming for which 50%
Generally, the packaging,
Example. If a word processing or more of the total compensation
repackaging, labeling, or minor
program includes a dictionary feature required to produce the film is paid for
assembly of QPP does not qualify as services performed by actors,
that may be used to spell-check a an MPGE activity unless you engage production personnel, directors, and
document, then the entire program
in another MPGE activity with respect
(including the dictionary feature) is a producers in the United States.
to that QPP. Furthermore, the
computer software program
installation of qualifying production A qualified film includes the
regardless of the form in which the
property does not qualify as an MPGE copyrights, trademarks, or other
dictionary feature is maintained or
activity unless you MPGE the intangibles related to the film. Also, a
stored.
qualifying production property being DPAD can be taken for the production
See Regulations section 1.199-3(j) installed and you have the benefits of a qualified film regardless of the
(3) for more information. and burdens of ownership of the QPP methods and means by which the film
Sound recordings. Sound under federal income tax principles is distributed.
recordings include any works that during the installation period.
result from the fixation of a series of For details, see Regulations See section 199(c)(6) and
musical, spoken, or other sounds. The section 1.199-3(e). Your MPGE of Regulations section 1.199-3(k) for
definition of sound recordings is QPP must be in whole or in significant more information. For special rules
limited to the master copy of the part within the United States. See related to S corporations,
recordings (or other copy from which Regulations section 1.199-3(f) and partnerships, S corporation
the holder is licensed to make and (g). shareholders, and partners
produce copies), and if the medium participating in the production of films,
Qualifying in-kind partnerships.
(such as compact discs, tapes, or see Film production under S
In general, partners of qualifying
other phonorecordings) in which the corporations and partnerships, earlier.
in-kind partnerships are treated as
sounds may be embodied is tangible,
manufacturing, producing, growing, or

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Cost of Goods Sold S corporations and loss deduction. You have $1,000 total
When figuring QPAI, cost of goods partnerships. S corporations and gross receipts and $750 DPGR. Your
sold includes the: partnerships that meet specific DPGR equal 75% of your total gross
• Cost of goods sold to customers, requirements can choose to figure receipts. Under the small business
and QPAI at the entity level and allocate simplified overall method, you
• Adjusted basis of non-inventory the QPAI to shareholders or partners. subtract $300 ($400 × 0.75) of your
property you sold or otherwise S corporations or partnerships that total cost of goods sold and other
disposed of in your trade or business. aren't eligible to figure QPAI under trade or business deductions,
those rules must report each expenses, or losses from your DPGR
Allocation of cost of goods sold. shareholder's or partner's share of its to figure your QPAI, which is $450
Generally, you must allocate your cost deductions, expenses, or losses on ($750 - $300).
of goods sold between DPGR and Schedule K-1 with other information
Average annual gross receipts.
non-DPGR using a reasonable the shareholder or partner needs to
For this purpose, your average annual
method. If you use a method to figure their DPAD.
allocate gross receipts between gross receipts are your average
DPGR and non-DPGR, the use of a Estates and trusts. An estate or annual gross receipts for the
different method to allocate cost of trust allocates directly attributable preceding 3 tax years. If your
goods sold won't be considered trade or business deductions, business hasn't been in existence for
reasonable, unless it is more expenses, or losses between DPGR 3 tax years, base your average on the
accurate. However, if you qualify to and non-DPGR under Regulations period it has existed. Include any
use the small business simplified section 1.652(b)-3. An estate or trust short tax years by annualizing the
overall method, you can use it to that is eligible must use the simplified short tax year's gross receipts by (a)
apportion both cost of goods sold and deduction method to allocate multiplying the gross receipts for the
other deductions, expenses, and indirectly attributable trade or short period by 12, and (b) dividing
losses between DPGR and business deductions, expenses, or the result by the number of months in
non-DPGR. For more information losses between DPGR and the short period.
about this allocation method, see non-DPGR. Otherwise, the estate or Estates and trusts. Estates and
Small Business Simplified Overall trust uses the section 861 method to trusts can't use the small business
Method, later. allocate these indirect items. simplified overall method.
For details about allocating cost of S corporations and partnerships.
goods sold, see Regulations section Small Business Simplified Overall
An S corporation or partnership (other
1.199-4. Method
than a qualifying in-kind partnership or
Other Deductions, Expenses, or You generally can use the small expanded affiliated group partnership)
business simplified overall method to can choose to use the small business
Losses apportion cost of goods sold and simplified overall method to figure
When figuring QPAI, other other deductions, expenses, and QPAI at the entity level and allocate
deductions, expenses, or losses losses between DPGR and that QPAI to shareholders or partners
include all deductions, expenses, or non-DPGR if you meet any of the if it meets the requirements of an
losses from a trade or business other following tests. eligible small pass-through entity. A
than cost of goods sold and employee • You are engaged in the trade or shareholder or partner who is
business expenses. business of farming and aren't allocated QPAI from an eligible small
Allocation and apportionment of required to use the accrual method of pass-through entity must report that
other deductions, expenses, or accounting (see section 447). QPAI on line 7.
losses. You must generally use one • Your average annual gross receipts For a definition of a qualifying
of the following three methods to (defined below) are $5 million or less. in-kind partnership, see Regulations
allocate and apportion other trade or • You are eligible to use the cash section 1.199-3(i)(7). For a definition
business deductions, expenses, or method of accounting under Rev. of an expanded affiliated group
losses between DPGR and Proc. 2002-28. You can find Rev. partnership, see Regulations section
non-DPGR. Proc. 2002-28 on page 815 of I.R.B. 1.199-3(i)(8).
• Small business simplified overall 2002-18 at IRS.gov/pub/irs-irbs/
method. (You must qualify to use this irb02-18.pdf. An S corporation or partnership is
an eligible small pass-through entity if
method.) it meets each of the following
• Simplified deduction method. (You Under the small business simplified
must qualify to use this method.) overall method, your total cost of requirements for the current tax year.
• Section 861 method. goods sold and other deductions, • It satisfies one of the following
expenses, and losses are ratably requirements: (a) it has average
However, don't allocate and annual gross receipts for the 3 tax
apportion a net operating loss apportioned between DPGR and
non-DPGR based on relative gross years preceding the current tax year
deduction or deductions not of $5 million or less, (b) it is engaged
attributable to the conduct of a trade receipts.
in the trade or business of farming and
or business to DPGR under any of the Example. Your total cost of goods isn't required to use the accrual
methods. sold and other trade or business method of accounting, or (c) it is
deductions, expenses, or losses are eligible to use the cash method of
$400 and don't include a net operating

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accounting under Rev. Proc. 2002-28 0.60) of your total other trade or Expanded affiliated groups. For
(that is, it has average annual gross business deductions, expenses, or additional rules that apply to
receipts of $10 million or less and isn't losses from your DPGR to figure your expanded affiliated groups, see
excluded from using the cash method QPAI, which is $120 ($600 - $240 - Regulations section 1.199-4(e)(4).
under section 448 of the Internal $240).
Revenue Code). Oil-related production activities. If
S corporations and partnerships.
• It has total cost of goods sold and you have oil-related QPAI, and you
An S corporation or partnership (other
deductions (excluding the net choose to use the simplified
than a qualifying in-kind partnership or
operating loss deduction) added deduction method, you must allocate
expanded affiliated group partnership)
together of $5 million or less. part of these costs to DPGR from
can choose to use the simplified
• It has DPGR. oil-related production activities to
deduction method to figure QPAI at
• If a partnership, it doesn't have a determine oil-related QPAI. See
the entity level and allocate that QPAI
partner that is an ineligible partnership Line 3, later.
to shareholders or partners if it meets
(qualifying in-kind partnerships or
the requirements of an eligible widely
expanded affiliated group Section 861 Method
held pass-through entity. A
partnerships). You don't have to meet any tests to
shareholder or partner who is
Expanded affiliated groups. For allocated QPAI from an eligible widely use the section 861 method. Under
additional rules that apply to held pass-through entity must report the section 861 method, you generally
expanded affiliated groups, see that QPAI on line 7. must apply the rules of the section
861 regulations to allocate and
Regulations section 1.199-4(f)(4). For a definition of a qualifying
apportion other trade or business
Oil-related production activities. If in-kind partnership, see Regulations
deductions, expenses, or losses
you have oil-related QPAI, and you section 1.199-3(i)(7). For a definition
between DPGR and non-DPGR.
choose to use the small business of an expanded affiliated group
Section 199 is treated as an
simplified overall method, you must partnership, see Regulations section
“operative section” described in
allocate part of these costs to DPGR 1.199-3(i)(8).
Regulations section 1.861-8(f).
from oil-related production activities to An S corporation or partnership is
determine oil-related QPAI. See an eligible widely held pass-through For details, see Regulations
Line 4, later. entity if it meets each of the following section 1.199-4(d).
For details about the small requirements for its current tax year.
business simplified overall method, • Either of the two tests discussed For guidance on automatic
see Regulations section 1.199-4(f). earlier under Simplified Deduction approval to change certain elections
Method. relating to the apportionment of
Simplified Deduction Method • It has total cost of goods sold and interest expense and research and
deductions added together of $100 experimentation expenditures, see
You generally can use the simplified million or less. Rev. Proc. 2006-42. You can find
deduction method to apportion other • It has DPGR. Rev. Proc. 2006-42 on page 931 of
deductions, expenses, and losses • On every day during the current tax I.R.B. 2006-47 at IRS.gov/pub/irs-irbs/
(but not cost of goods sold) between year, all of its shareholders or partners irb06-47.pdf.
DPGR and non-DPGR if you meet are individuals, estates, or trusts S corporations. An S corporation
either of the following tests. described (or treated as described) in can't use the section 861 method to
• Your total trade or business assets section 1361(c)(2). figure QPAI. Unless it is eligible to use
at the end of your tax year are $10 • On every day during the current tax the small business simplified overall
million or less. year, no shareholder or partner owns, method or simplified deduction
• Your average annual gross receipts alone or combined with the ownership method, an S corporation must report
(defined above) are $100 million or interests of all related persons, more each shareholder's share of its
less. than 10% of (a) total shares of the S deductions, expenses, or losses on
corporation or (b) the profits or capital
Under the simplified deduction Schedule K-1 (Form 1120S) that the
interests in the partnership.
method, your other trade or business shareholder needs to figure their
deductions, expenses, or losses are Estates and trusts. If eligible by DPAD.
ratably apportioned between DPGR meeting one of the two tests Partnerships. A partnership (other
and non-DPGR based on relative described earlier, an estate or trust than a qualifying in-kind partnership or
gross receipts. must use the simplified deduction expanded affiliated group partnership)
Example. Your total other trade or method to allocate its indirectly can choose to use the 861 method to
business deductions, expenses, or attributable trade or business figure QPAI at the entity level and
losses are $400 and don't include a deductions, expenses, or losses allocate that QPAI to qualifying
net operating loss. You have $240 of between DPGR and non-DPGR. All partners (defined later) if it meets the
cost of goods sold allocable to DPGR. estates and trusts must allocate requirements of an eligible 861
You have $1,000 total gross receipts directly attributable deductions, partnership. A partner who is
and $600 DPGR. Your DPGR equal expenses, or losses between DPGR allocated QPAI from an eligible 861
60% of your total gross receipts. and non-DPGR under Regulations partnership must report that QPAI on
Under the simplified deduction section 1.652(b)-3. line 7.
method, you subtract $240 ($400 ×

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For a definition of a qualifying Estates and trusts. An estate or wages you paid to your employees
in-kind partnership, see Regulations trust that can't use the simplified that are properly allocable to DPGR
section 1.199-3(i)(7). For a definition deduction method must use the (including Form W-2 wages allocated
of an expanded affiliated group section 861 method to allocate and to you on a Schedule K-1). If you
partnership, see Regulations section apportion its indirectly attributable didn't pay Form W-2 wages, you
1.199-3(i)(8). trade or business deductions, generally aren't allowed a DPAD.
An eligible 861 partnership must expenses, or losses between DPGR However, you don't need Form W-2
meet the following requirements for its and non-DPGR. All estates and trusts wages to claim a DPAD you are
current tax year. must allocate directly attributable allocated as a:
• It has at least 100 partners on any deductions, expenses, or losses • Patron of an agricultural or
day during the partnership's tax year. between DPGR and non-DPGR under horticultural cooperative, or
• At least 70% of the partnership is Regulations section 1.652(b)-3. • Member of an expanded affiliated
owned, at all times during its tax year, group.
Oil-related production activities. If
by qualifying partners (defined next).
you have oil-related QPAI, apply the Note. When figuring your DPAD, the
• It has DPGR.
rules of section 861 to determine the limit equal to 50% of Form W-2 wages
Qualifying partner. A qualifying amount of other trade or business is based only on Form W-2 wages
partner is a partner that, on each day deductions, expenses, or losses to properly allocable to DPGR.
during the partnership's tax year that deduct for purposes of determining
Form W-2 wages from an S corpo-
the partner owns an interest in the oil-related QPAI.
ration or partnership. S
partnership:
corporations and partnerships that
• Is not a general partner or a Adjusted Gross or Taxable
meet specific requirements can
managing member of a partnership Income choose to figure Form W-2 wages at
organized as a limited liability Your allowable DPAD generally can't the entity level and report the
company, be more than 9% of your adjusted allocated portion of Form W-2 wages
• Doesn't materially participate gross income if you are an individual, on Schedule K-1 to the S corporation
(discussed later) in the activities of the estate, or trust (taxable income for all shareholder or partner who then
partnership, other taxpayers) figured without the combines the allocated portion with
• Doesn't hold, alone or combined DPAD. If you don't have adjusted Form W-2 wages from other sources
with the interests of all related gross or taxable income, you on Form 8903 to determine the
persons (defined next), 5% or more of generally aren't allowed a DPAD. DPAD.
the profits or capital interests in the
partnership, Note. Although patrons without If the S corporation or partnership
• Is not an ineligible entity (qualifying adjusted gross or taxable income can meets the requirements to be
in-kind partnership or expanded claim a DPAD, the DPAD can't create classified as one of the eligible entities
affiliated group partnership). or increase a net operating loss under listed below, it can figure Form W-2
Related persons. For purposes of section 172(d). However, you don't wages at the entity level and allocate
determining whether a partner is a need taxable income to claim a DPAD Form W-2 wages to S corporation
qualifying partner, persons are related you are allocated as a member of an shareholders or partners.
if they meet the requirements of Expanded Affiliated Group (EAG), and • Eligible small pass-through entity.
sections 267(b) or 707(b), the DPAD can create or increase a See S corporations and partnerships,
disregarding sections 267(e)(1) and net operating loss under Regulations under Small Business Simplified
(f)(1)(A). section 1.199-7(c)(2). Overall Method, earlier, for the
requirements.
Agricultural and horticultural co-
Material participation. A • Eligible widely held pass-through
operatives. For this purpose, figure
qualifying partner can't materially entity. See S corporations and
taxable income without taking into
participate in the activities of the partnerships, under Simplified
account any allowable deduction for
partnership. See section 5.05 of Rev. Deduction Method, earlier, for the
patronage dividends, per-unit retain
Proc. 2007-34 for the definition of requirements.
allocations, or nonpatronage
material participation. • Eligible 861 partnership. See
distributions. Partnerships, under Section 861
Non-qualifying partners. An Estates and trusts. See Line 11, Method, earlier, for the requirements.
eligible 861 partnership can't allocate later, to figure adjusted gross income. Form W-2 wages from an estate or
QPAI to non-qualifying partners (see
Qualifying partner, earlier). Instead, Unrelated business taxable in- trust. An estate or trust generally will
the partnership must report each come (UBTI). The allowable DPAD figure its Form W-2 wages and
non-qualifying partner's share of of an organization taxed on its UBTI apportion them between the
deductions, expenses, or losses on under section 511 generally can't be beneficiary and the fiduciary (and
Schedule K-1 that the partner needs more than 9% of its UBTI figured among the beneficiaries) and report
to figure their DPAD. The partnership without the DPAD. each beneficiary's share on
items allocated to non-qualifying Schedule K-1 (Form 1041).
partners must be excluded for Form W-2 Wages Form W-2 wages for services per-
purposes of figuring QPAI at the Your allowable DPAD generally can't formed in Puerto Rico. Taxpayers
partnership level. be more than 50% of the Form W-2 that determine DPGR under section

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199(d)(8)(A), figure Form W-2 wages tax year are treated as W-2 wages for Tracking wages method. Under the
by including wages paid for services that short tax year. tracking wages method, Form W-2
performed in Puerto Rico without wages are figured as follows.
Acquisition or disposition of a
regard to section 3401(a)(8), but only
trade or business. If you acquired or 1. Add the amounts reported in
during the first 12 tax years of the
disposed of a trade or business that box 1 of the relevant Forms W-2 that
taxpayer that begin after 2005 and
causes you and another employer to are also wages for federal income tax
before 2018.
pay W-2 wages to employees of the withholding purposes.
Form W-2 wages paid to produce a acquired or disposed of trade or 2. Add any amounts reported in
qualified film. Form W-2 wages business during the calendar year, box 1 of the relevant Forms W-2 that
include compensation for services then the W-2 wages for the calendar are both:
performed in the United States by year of the acquisition or disposition
actors, production personnel, are allocated between each employer a. Wages for federal income tax
directors, and producers to produce a based on the period that the withholding purposes, and
qualified film. See Qualified Film, employees of the acquired or b. Supplemental unemployment
earlier, for more information. disposed of trade or business were compensation benefits.
employed by each employer. If you 3. Subtract (2) from (1).
Figuring Form W-2 Wages Used have a short tax year that doesn’t 4. Add together any amounts
To Figure the 50% Limit include a calendar year ending within reported in box 12 of the relevant
You figure Form W-2 wages used to your short tax year, see Short tax Forms W-2 that are properly coded D,
figure the 50% limit in two steps. First, year, earlier. E, F, G, or S.
you must determine the amount of
Non-duplication rule. Amounts that
wages to classify as Form W-2 wages 5. Add (3) and (4).
are treated as Form W-2 wages for a
under Regulations section 1.199-2(e)
tax year under any method can't be
(1). Second, you must figure Form Step 2. Form W-2 Wages
treated as Form W-2 wages for any
W-2 wages that are properly allocable Allocable to DPGR
other tax year. Also, an amount can't
to DPGR. After you calculate Form W-2 wages,
be treated as Form W-2 wages by
more than one taxpayer. as discussed in Step 1, you must
Step 1. Figuring Form W-2 Wages figure Form W-2 wages that are
Unmodified box method. Under the
You can use one of the following three properly allocable to DPGR. You
unmodified box method, Form W-2
methods to figure your Form W-2 report the Form W-2 wages that are
wages are the smaller of:
wages. properly allocable to DPGR on line 16
• Unmodified box method. 1. The sum of the amounts of Form 8903.
• Modified box 1 method. reported in box 1 of the relevant
• Tracking wages method. Forms W-2, or You can figure Form W-2 wages
2. The sum of the amounts that are properly allocable to DPGR
After you figure Form W-2 wages, reported in box 5 of the relevant under one of the following methods.
see Step 2, later, to determine the Forms W-2. • Small business simplified overall
Form W-2 wages to report on line 16 method safe harbor.
of Form 8903. Modified box 1 method. Under the • Wage expense safe harbor.
modified box 1 method, Form W-2 • Any other reasonable method
Relevant Forms W-2. To figure your wages are figured as follows. based on all the facts and
Form W-2 wages, generally use the
1. Add the amounts reported in circumstances.
sum of the amounts you properly
box 1 of the relevant Forms W-2.
report for each employee on Form Small business simplified overall
W-2, Wage and Tax Statement, for 2. Add all the amounts described method safe harbor. If you use the
the calendar year ending with or below and included in box 1 of the small business simplified overall
within your tax year. However, don't relevant Forms W-2. method to allocate costs between
use any amounts reported on a Form a. Amounts not considered wages DPGR and non-DPGR (see Small
W-2 filed with the Social Security for federal income tax withholding Business Simplified Overall Method,
Administration more than 60 days purposes. earlier), you can use the small
after its due date (including b. Supplemental unemployment business simplified overall method
extensions). compensation benefits. safe harbor to determine the amount
of Form W-2 wages allocable to
Short tax year. If you have a short c. Sick pay or annuity payments DPGR. Under this safe harbor
tax year, you generally will use the from which the recipient requested method, the amount of Form W-2
sum of the amounts you properly federal income tax withholding. wages that is properly allocable to
report for each employee on Form 3. Subtract (2) from (1). DPGR equals the proportion of DPGR
W-2 for the calendar year ending with
or within that short tax year. However, 4. Add together any amounts to total gross receipts.
if you have a short tax year that reported in box 12 of the relevant Wage expense safe harbor. If you
doesn't include a calendar year Forms W-2 that are properly coded D, are using either the section 861
ending within that short tax year, then E, F, G, or S. method of cost allocation under
wages you properly report on Form 5. Add (3) and (4). Regulations section 1.199-4(d) or the
W-2 which you paid during the short simplified deduction method under

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Regulations section 1.199-4(e), you activities) on lines 1 through 10, line 3, column (b), you must make an
determine the amount of wages column (b). additional calculation to determine the
properly allocable to DPGR by amount to report on line 3, column (a).
multiplying the amount of wages for Line 1 Multiply the amount reported on line 3,
the tax year by the ratio of your wage Domestic Production column (b), by the ratio of oil-related
expense included in calculating QPAI DPGR reported on line 1, column (a),
for the tax year to your total wage Gross Receipts (DPGR) divided by DPGR from all activities
expense used in calculating your Enter your DPGR (defined earlier in reported on line 1, column (b). Enter
taxable income (or adjusted gross the General Instructions under the result on line 3, column (a). Don't
income) for the tax year without Domestic Production Gross reduce the amount reported on line 3,
regard to any wage expenses Receipts). column (b), by this amount.
disallowed by sections 465, 469, If you use the section 861 method,
704(d), or 1366(d). Line 2
apply the rules of section 861 to
If you use the section 861 method Allocable Cost of Goods determine the amount to report on
or the simplified deduction method, Sold line 3, column (a).
you must use the same expense Enter your cost of goods sold
allocation and apportionment allocable to DPGR on line 2 unless Line 4
methods that you use to determine you are using the small business Small Business Simplified
QPAI to allocate and apportion wage simplified overall method. If you are
Overall Method
expense for purposes of the safe using the small business simplified
harbor. overall method, skip line 2, and go to Enter the amount of cost of goods
Line 4. sold and other deductions or losses
Wage expense included in cost you ratably apportion to DPGR using
of goods sold. When figuring the For more information about the small business simplified overall
ratio of your wage expense included allocating costs of goods sold, see method.
in calculating QPAI for the tax year to Cost of Goods Sold, earlier, in the
your total wage expense used in General Instructions. See Small Oil-related production activities. If
calculating your adjusted gross Business Simplified Overall Method, you use the small business simplified
income or taxable income (as the earlier in the General Instructions, for overall method to calculate the cost of
case may be) for the tax year, more information about using this goods sold and other deductions,
determine the wage expense included method to allocate cost of goods sold expenses, and losses reported on
in cost of goods sold using any and other deductions or losses to line 4, column (b), you must make an
additional calculation to determine the
reasonable method based on all of the DPGR.
amount to report on line 4, column (a).
facts and circumstances. For
Multiply the amount reported on line 4,
example, it may be reasonable to use Line 3
column (b), by the ratio of oil-related
(a) the amount of direct labor included Allocable Deductions and DPGR reported on line 1, column (a),
in cost of goods sold or (b) section
Losses divided by DPGR from all activities
263A labor costs (as defined in
Regulations section 1.263A-1(h)(4) Enter your other deductions or losses reported on line 1, column (b). Enter
(ii)) included in cost of goods sold. properly allocable to DPGR on line 3 the amount on line 4, column (a).
unless you are using the small Don't reduce the amount reported on
More information. For more business simplified overall method. If line 4, column (b), by this amount.
information on figuring your Form W-2 you are using the small business
wages, see Regulations section simplified overall method, skip line 3, Line 7
1.199-2 and Rev. Proc. 2006-47. You and go to Line 4. Beneficiaries of estates and trusts,
can find Rev. Proc. 2006-47 on partners, and S corporation
page 869 of I.R.B. 2006-45 at If you are using the simplified
IRS.gov/pub/irs-irbs/irb06-45.pdf. deduction method, enter on line 3 the shareholders report the QPAI
other deductions or losses you ratably distributed from estates or trusts, and
For more information on figuring apportion to DPGR. See Simplified certain partnerships or S corporations
Form W-2 wages properly allocable to Deduction Method, earlier in the on line 7. The QPAI should be
DPGR, see Regulations section General Instructions, for more reported to you on Schedule K-1 for
1.199-2(e)(2). information about this method. Forms 1041, 1065, or 1120S. See the
related Schedule K-1 and its
If you are using the section 861 instructions for more information.
Specific Instructions method, enter on line 3 the other
Complete lines 1 through 10, deductions or losses you allocate or Line 9
apportion to DPGR. See Section 861
! column (a), only if you have Estates and trusts must use
CAUTION oil-related production Method, earlier in the General Regulations section 1.652(b)-3 to
activities. All others, do not complete Instructions, for more information allocate QPAI to beneficiaries if DNI is
lines 1 through 9, column (a), and about this method. distributed or required to be
enter zero on line 10a. Oil-related production activities. If distributed to beneficiaries. Report the
you use the simplified deduction amount of QPAI allocated to
Enter amounts for all activities method to calculate the other beneficiaries on line 9. See Estates
(including oil-related production deductions or losses reported on
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and trusts, earlier under Definitions Note. If you have extraterritorial and trusts, earlier under Definitions
and Special Rules. income (ETI), figure taxable income and Special Rules.
without regard to any claimed ETI
Line 10a Oil-Related exclusions. Line 24
Qualified Production See Regulations section 1.199-1(b) Expanded Affiliated Group
Activities Income (1) for more information. Allocation
Add lines 1 through 9, column (a), to These instructions explain how
determine oil-related QPAI. If you Line 14a expanded affiliated groups (EAGs)
don't have oil-related QPAI, don't If you have oil-related qualified (defined earlier under Definitions and
complete lines 1 through 9, column production income, use line 14a to Special Rules) figure and report the
(a), and enter zero on line 10a. determine the least of the following DPAD. Certain members of an EAG
amounts. may not be required to complete the
Line 11 • Oil-related QPAI—line 10a, entire Form 8903. See How To
• QPAI—line 10b, or
Income Limitation Report, later.
• Adjusted gross income for an
Individuals. Enter your adjusted individual, estate, or trust (taxable Computation of the EAG's
gross income from line 7 of Form income for all other DPAD
1040 figured without the DPAD. taxpayers)—line 11. In general, the DPAD for an EAG is
determined by aggregating each
Olympic and Paralympic medals All others, enter zero on line 14a. member's taxable income or loss,
and USOC prize money. For
QPAI, and Form W-2 wages. A
purposes of figuring your DPAD, your Line 14b Reduction for member's QPAI may be positive or
adjusted gross income doesn't
include the value of any medal Oil-Related Qualified negative. Also, a member's taxable
awarded in, or any prize money Production Activities income or loss and QPAI are
received from the United States Income determined under the member's
method of accounting.
Olympic Committee on account of If you have oil-related qualified
competition in the Olympic Games or production income, use line 14b to Members with different tax years.
Paralympic Games. If line 7 of your reduce your DPAD by 3% of the If members of an EAG have different
Form 1040 includes these amounts, amount reported on line 14a. tax years, in determining the DPAD of
then reduce your adjusted gross a member, the reporting member
income by them before entering it on All others, enter zero on line 14b. must take into account the taxable
line 11. income or loss, QPAI, and Form W-2
Corporations. Enter your taxable Line 16 wages of each group member that are
income from the applicable line of Form W-2 Wages both:
your tax return (for example, line 30 of Enter your Form W-2 wages that are • Attributable to the period that the
Form 1120) figured without the DPAD. properly allocable to DPGR member of the EAG and the reporting
(discussed earlier under Form W-2 member are both members of the
Members of EAGs. See Line 24, Wages). Don't include Form W-2 EAG, and
later. wages you must report on line 17. • Taken into account in a tax year
Agricultural and horticultural co- that ends with or within the tax year of
operatives. Enter your taxable Line 17 the reporting member with respect to
income figured without the DPAD or Beneficiaries of estates and trusts, which the DPAD is figured.
the deductions for patronage partners, and S corporation For an example that explains the
dividends, per-unit retain allocations, shareholders report the Form W-2 above requirements, see Regulations
and nonpatronage distributions under wages distributed from estates or section 1.199-7.
section 1382(b) or (c). trusts, and certain partnerships or S Net operating losses. The net
Estates and trusts. Enter your corporations on line 17. The Form operating loss (NOL) of a member of
adjusted gross income figured without W-2 wages should be reported to you an EAG that is used in the
the DPAD. See the Instructions for on the Schedule K-1 for Forms 1041, computation of the EAG's taxable
Form 1041 to figure adjusted gross 1065, or 1120S. See the related income isn't treated as an NOL
income. Use the method discussed Schedule K-1 and its instructions for carryback or carryover to determine
under How to figure AGI for estates more information. the taxable income limitation in a prior
and trusts, under Line 15a–Other or subsequent year for purposes of
Deductions. Line 19 section 199(a)(1)(B). See Regulations
Estates and trusts must use section 1.199-7(b)(4) for more
Unrelated business taxable in- Regulations section 1.652(b)-3 to information.
come (UBTI). An organization taxed allocate Form W-2 wages to
on its UBTI under section 511 enters beneficiaries if DNI is distributed or Allocation of the DPAD to
its UBTI from line 38 of Form 990-T required to be distributed to Members of the EAG
figured without the DPAD. beneficiaries. Report the amount of The EAG's DPAD is allocated among
the Form W-2 wages allocated to members of the EAG based on the
beneficiaries on line 19. See Estates ratio of each member's QPAI to the

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total QPAI of the EAG. The allocation method, a consolidated group consolidated group completes lines 1
is made regardless of whether the determines its QPAI by reference to through 25 for the group. If the EAG is
EAG member has taxable income or its members' DPGR, non-DPGR, cost comprised of more than just the
loss or Form W-2 wages for the tax of goods sold, and all other members of a single consolidated
year. If a member has negative QPAI, deductions, expenses, or losses, group, the common parent files a
that member's QPAI is treated as zero determined on a consolidated basis. Form 8903 for the consolidated group
for purposes of the allocation. as either the reporting member or as
How To Report an EAG member other than the
Consolidated Groups All members of an EAG are treated as reporting member, whichever is
Under section 199, a consolidated a single corporation for purposes of appropriate. In all events, the common
group is treated as a single member of determining the DPAD. However, the parent attaches a schedule that
the EAG. If all members of an EAG DPAD is allocated to each member. shows the amount of the consolidated
are members of the same group's DPAD allocated to each
EAG reporting member. The EAG
consolidated group, the DPAD of the member of the consolidated group,
chooses a reporting member from
consolidated group is determined and how the allocated amount was
amongst all members of the EAG with
based on the consolidated taxable calculated.
the same tax year to figure the DPAD
income or loss, QPAI, and Form W-2
for all EAG members (computing
wages of the group and not the Line 25
members). The reporting member
separate taxable income or loss,
completes lines 10a through 16 and Domestic Production
QPAI, and Form W-2 wages of its
lines 18 through 22 of the Form 8903
members. The consolidated group will Activities Deduction
for the group.
generally file only one Form 8903. For Combine lines 22 through 24 and
details, see Regulations section The reporting member also does enter the result on line 25. For Form
1.199-7. the following. 1040 returns filed after tax year 2017,
include the result from line 25 of Form
If an EAG includes both 1. Enters the portion of the
8903 on Schedule 1 (Form 1040),
consolidated and non-consolidated deduction allocated to the other
line 36. For Form 1120 returns filed
members, the consolidated (not members of the EAG (including
after tax year 2017, enter the result
separate) taxable income or loss, non-computing members) as a
from line 25 of Form 8903 on line 26,
QPAI, and Form W-2 wages of the negative number on line 24.
Other deductions.
consolidated group are aggregated 2. Completes lines 23 and 25.
For tax years beginning after
with the taxable income or loss, QPAI, 3. Attaches a schedule showing
December 31, 2017, additional
and Form W-2 wages of the how the reporting member figured its
guidance under section 199A(g) is
non-consolidated group members to own QPAI.
determine the DPAD. For details, see pending.
Regulations section 1.199-7(d)(4). 4. Attaches a schedule that shows
how the DPAD was figured for the Agricultural and Horticultural
A consolidated group's DPAD (or group and each member's name, EIN, Cooperatives
the DPAD allocated to a consolidated and share of the DPAD. Reduce the amount the cooperative
group that is a member of an EAG) is 5. Provides a copy of the group deducts under section 1382 by the
allocated to the members of the DPAD computation schedule to the portion of the cooperative's DPAD
consolidated group in proportion to other computing members of the allocated to its patrons. However, the
each member's QPAI, if any, group. entire amount on line 25, which
regardless of whether the includes any amount allocated to
consolidated group member has: EAG computing member other patrons, is deductible under section
• Separate taxable income or loss for than the reporting member. An 199 by the cooperative. See
the tax year, and EAG computing member other than Agricultural and horticultural
• Form W-2 wages for the tax year. the reporting member does the cooperatives in the General
For purposes of allocating the following. Instructions for more information on
DPAD of a consolidated group among 1. Completes a separate Form this subject.
its members, any redetermination of a 8903, skips lines 1–22, and enters its How to report. Cooperatives aren't
corporation's receipts, cost of goods share of the group deduction on permitted to net patronage losses with
sold, or other deductions from an line 24 as a positive number. nonpatronage income. Therefore,
intercompany transaction described in 2. Completes lines 23 and 25. they must figure taxable income from
Regulations section 1.1502-13(c)(1)(i) 3. Attaches a schedule showing patronage or nonpatronage activities
or (c)(4) isn't taken into account, and if how the computing member figured its separately on Schedule G, Form
a consolidated group member has own QPAI. 1120-C.
negative QPAI, the member's QPAI is
treated as zero. 4. Attaches a copy of the group Patronage income and
DPAD computation schedule deductions only. Cooperatives that
Simplified deduction and small provided by the reporting member. have only patronage income and
business simplified overall meth- deductions generally complete Form
ods. For purposes of applying the Consolidated groups. If the EAG is 8903 as described earlier in the
simplified deduction method and the comprised of a single consolidated instructions.
small business simplified overall group, the common parent of the
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Patronage and nonpatronage                Report the total amount of the conform to lines 1 through 24 of Form 
income and deductions. For tax    DPAD to be claimed on Form 1120-C      8903.
years beginning before January 1, on line 25 of Form 8903, and leave     Enter the DPAD from patronage 
2018, cooperatives with both      lines 1 through 24 blank. Attach to    and nonpatronage sources reported 
patronage and nonpatronage income Form 8903 separate calculations of     on the attachment on line 6a, column 
or deductions must follow the     the DPAD from patronage and            (a), Patronage, and line 6a, column 
instructions below for completing nonpatronage activities, which         (b), Nonpatronage, respectively, of 
Form 8903.                                                               Schedule G, Form 1120-C.

Instructions for Form 8903 (Rev. 12-2019) -13-

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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 5 hr., 58 min.
Learning about the law or the form 7 hr., 33 min.
Preparing, copying, assembling, and sending the form to the IRS 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.

-14- Instructions for Form 8903 (Rev. 12-2019)

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