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Department of the Treasury
Internal Revenue Service
Instructions for Form 8903

(Rev. December 2018)
Domestic Production Activities Deduction

Section references are to the Internal payments received from the specified and Form W-2 Wages, later, for more
Revenue Code unless otherwise noted. cooperative. Qualified payments are information about activities in Puerto
amounts reported to you on Form Rico.
Future Developments 1099-PATR, or
• 50% of so much of the W-2 wages General Instructions
For the latest information about you paid with respect to the portion of
developments related to Form 8903 your trade or business conducted with Purpose of Form
and its instructions, such as respect to the specified cooperative. Use Form 8903 to figure your
legislation enacted after they were
published, go to IRS.gov/Form8903. If you did not pay wages, your domestic production activities
TIP patron reduction is zero. deduction (DPAD).
Future revisions of Form 8903. Increase your deductible
The IRS will revise the December amount of QBI by amounts reported to Your DPAD is generally 9% of the
2018 version of Form 8903 only when you as Domestic Production Activities smaller of:
necessary. Continue to use the 2018 Deductions on Form 1099-PATR. 1. Your qualified production
version of Form 8903 for tax years Patrons of specified cooperatives do activities income (QPAI), or
beginning after 2017 until a new not use Form 8903 to report the 2. Your adjusted gross income for
revision is issued. DPAD passed through to you. an individual, estate, or trust (taxable
income for all other taxpayers) figured
What's New
Note. The repeal of section 199 for without the DPAD.
Domestic production activities de- tax years beginning after December
duction (DPAD). The DPAD has 31, 2017, does not apply to a qualified Reduced DPAD for oil-related
been repealed for tax years beginning payment received by a patron from a QPAI. A taxpayer with oil-related
after 2017. For specified agricultural specified agricultural or horticultural QPAI also must reduce the DPAD by
or horticultural cooperatives (specified cooperative in a tax year beginning 3% of the least of the following
cooperatives) a deduction under after December 31, 2017, to the amounts.
section 199A(g) is available for tax extent such qualified payment is • Oil-related QPAI.
years beginning after December 31, attributable to qualified production • QPAI.
2017. Additional guidance is pending. activities income with respect to which • Adjusted gross income for an
See Who Must File, later, for details. a deduction is allowable to the individual, estate, or trust (taxable
Form 1099-PATR, Taxable Distri- cooperative under former section 199 income for all other taxpayers) figured
butions Received From Coopera- for a tax year of the cooperative without DPAD.
tives. Special rule under section beginning before January 1, 2018. DPAD limited to wages paid. Your
199A(b)(7) for non-corporate pa- Such qualified payment remains DPAD generally can't be more than
trons of specified cooperatives for subject to former section 199 and any 50% of the Form W-2 wages you paid
tax years beginning after Decem- section 199 deduction allocated by to your employees that are properly
ber 31, 2017. Patrons of specified the cooperative to its patrons related allocable to domestic production
cooperatives (except C corporations) to such qualified payment may be gross receipts (including Form W-2
that are entitled to a deduction under deducted by such patrons in wages allocated to you on a
section 199A(a) for qualified business accordance with former section 199. Schedule K-1).
income of a trade or business that In addition, no deduction is allowed
includes qualified payments from a under section 199A for such qualified Who Must File
specified cooperative must figure a payments
DPAD for income attributable to
patron reduction under section Activities in Puerto Rico. The domestic production activities be-
199A(b)(7). Instructions for Form 8903 have been fore 2018. Individuals, corporations,
1. First determine your deductible revised due to recent legislation that cooperatives, estates, and trusts use
amount of qualified business income extended the inclusion of certain Form 8903 to figure their allowable
(QBI) for any trade or business with activities in Puerto Rico when figuring DPAD from certain trade or business
respect to income received from a the domestic production activities activities.
specified agricultural or horticultural deduction (DPAD). You may be able Shareholders of S corporations and
cooperative. to include these activities when partners include information provided
2. Reduce your deduction from figuring domestic production gross by the S corporation or partnership
QBI by an amount equal to the lesser receipts (DPGR) and Form W-2 when figuring their allowable DPAD.
of: wages for tax years beginning before Beneficiaries of an estate or trust
• 9% of so much of the QBI as is January 1, 2018. See Domestic include information provided by the
properly allocable to qualified Production Gross Receipts (DPGR) estate or trust when figuring their

Jan 14, 2019 Cat. No. 39878Q

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allowable DPAD. Patrons of certain 199A(g), write “SPECIFIED these amounts to shareholders and
agricultural or horticultural COOPERATIVE DPAD” across the partners. See Qualified Production
cooperatives may be allocated a top of Form 8903. The Form 8903 Activities Income (QPAI) and Form
share of the cooperative's DPAD to must be attached to the cooperative’s W-2 Wages for more information.
include on Form 8903. return. All other S corporations and
partnerships need to provide each
Married individuals filing a joint Definitions and Special shareholder or partner with
income tax return figure the deduction
on one Form 8903 using the Rules information the shareholder or partner
needs to figure the DPAD.
applicable items of both spouses. Trade or business. QPAI and Form
W-2 wages are figured by only taking Film production. S corporation
Note. Unless you were allocated a into account items that are attributable shareholders or partners that own
share of a cooperative's DPAD or you to the actual conduct of a trade or 20% or more (directly or indirectly) of
are a member of an expanded business. An activity qualifies as a the capital interests in the S
affiliated group (EAG), you won't be trade or business if your primary corporation or the partnership are
allowed a DPAD unless you can enter purpose for engaging in the activity is treated as having engaged directly in
on Form 8903 a positive amount for all for income or profit and you are any film produced by the S
three of the following. involved in the activity with continuity corporation or partnership, and the S
• Qualified production activities and regularity. For example, a corporation or partnership is treated
income (QPAI). sporadic activity or a hobby doesn't as having engaged directly in any film
• Adjusted gross income for an qualify as a trade or business. produced by the S corporation
individual, estate, or trust (taxable shareholder or partner. See section
income for all other taxpayers). Coordination with other deduc-
• Form W-2 wages you paid to your tions. Expenses that otherwise 199(d)(1)(A)(iv) for more information.
employees. If you didn't pay any Form would be taken into account for Estates and trusts. Generally, an
W-2 wages (or have Form W-2 wages purposes of figuring the DPAD are estate or trust will figure its:
allocated to you on a Schedule K-1), only taken into account if and to the • QPAI (which may be less than
you can't claim a DPAD. extent the losses and deductions from zero), and
all of your activities aren't disallowed • Form W-2 wages it paid to its
For details, see the discussions of by a provision of the Internal Revenue employees (including Form W-2
these three items, later. Code, including the following. wages allocated to it on a
DPAD for income attributable to • Basis limits on a partner's share of Schedule K-1).
partnership losses. These items are then allocated among
domestic production activities af-
ter 2017. DPAD has been repealed • Basis limits on a shareholder's the estate or trust and its beneficiaries
share of S corporation losses. based on the relative proportion of the
for tax years beginning after 2017.
Don’t use Form 8903 to claim DPAD • At-risk rules. estate's or trust's distributable net
for 2018 or later years unless: • Passive activity rules. income (DNI) for the tax year that is
If only a portion of your losses or distributed or required to be
1. Your tax year began before distributed to the beneficiary or
deductions are allowed in the current
January 1, 2018, retained by the estate or trust. If the
tax year, a proportionate share of the
2. You are a shareholder in an S losses or deductions that reflect estate or trust has no DNI for the tax
corporation or partner in a partnership expenses allocated to your gross year, QPAI and Form W-2 wages are
and the entity has a tax year that receipts from qualified production allocated entirely to the estate or trust.
began before January 1, 2018, activities, after applying the provisions Although estates and trusts actually
3. You are a beneficiary of an discussed earlier, is taken into allocate their QPAI and Form W-2
estate or trust and the estate or trust account for purposes of figuring the wages to beneficiaries as discussed
has a tax year that began before DPAD for the current tax year. If any earlier, when completing Form 8903
January 1, 2018, of the losses or deductions disallowed they must reduce the amounts
4. You are a patron of an for tax years beginning after 2004 are reported on lines 8 and 18 to reflect
agricultural or horticultural cooperative allowed in a later tax year, a the portion of those amounts that
with a tax year that began before proportionate share of the expenses were allocated to beneficiaries as
January 1, 2018. reflected in those losses or QPAI or Form W-2 wages. For details,
deductions is taken into account in see Line 9, later.
Specified cooperatives’ DPAD af- figuring the DPAD in the later tax year.
Agricultural and horticultural co-
ter 2017. For tax years beginning on A net operating loss under section operatives. Generally, an
or after January 1, 2018, specified 172 generally is figured without the agricultural or horticultural cooperative
agricultural or horticultural section 199 deduction. can choose to allocate all, some, or
cooperatives to which part I of none of its allowable DPAD (but not
subchapter T applies may qualify for a S corporations and partnerships.
deduction under section 199A(g). The DPAD is applied at the QPAI) to its patrons.
Additional guidance is pending. shareholder or partner level. Certain S An agricultural or horticultural
corporations and partnerships can cooperative is an organization
For agricultural or horticultural figure QPAI and Form W-2 wages at described in section 1381 that is
cooperatives’ utilizing Form 8903 to the entity level and allocate and report engaged in:
compute a deduction under section
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• Manufacturing, producing, growing, treated as a single corporation to Qualified Production
or extracting (MPGE) in whole or figure their DPAD. The DPAD is
Activities Income (QPAI)
significant part any agricultural or allocated among the members of the
horticultural product, or group in proportion to each member's Your allowable DPAD generally can't
• Marketing agricultural or respective amount (if any) of QPAI. be more than 9% of your QPAI. If you
horticultural products that its patrons See Line 24 before completing Form don't have QPAI, you generally aren't
have MPGE. 8903. allowed a DPAD. However, you don't
need QPAI to claim a DPAD you are
Agricultural or horticultural products An EAG is an affiliated group as allocated as a patron of an agricultural
for this purpose include fertilizer, defined in section 1504(a) or horticultural cooperative.
diesel fuel, and other supplies used in determined:
agricultural or horticultural production. • By substituting "more than 50%" for Figuring QPAI. QPAI is the excess
An organization engaged in marketing "at least 80%" each place it appears, (if any) of:
agricultural or horticultural products is and 1. Domestic production gross
treated as having MPGE in whole or in • Without regard to paragraphs (2) receipts (DPGR), over
significant part any qualifying and (4) of section 1504(b). 2. The sum of:
production property marketed by the
A corporation's status as a member
organization that its patrons have a. Cost of goods sold allocable to
of an EAG is determined on a daily
MPGE. DPGR, and
basis. Also, if a corporation joins or
Allocation of cooperative DPAD. leaves an EAG, its status as a b. Other expenses, losses, or
A patron who receives a patronage member of the EAG is determined at deductions (other than the DPAD)
dividend or qualified per-unit retain the end of the day on which it joins or which are properly allocable to DPGR.

certificate can be allocated any leaves the EAG. Oil-related QPAI. A taxpayer with
portion of the DPAD allowed with If all the capital and profits interests oil-related QPAI must reduce the
respect to the portion of the QPAI to of a partnership are owned by DPAD by 3% of the least of the
which such payment is attributable. members of a single EAG at all times following amounts.
The cooperative must identify the during the partnership's tax year, the • Oil-related QPAI.
portion of its DPAD allocated to a partnership and all members of the • QPAI.
patron in a written notice mailed to the group are treated as a single taxpayer • Adjusted gross income for an
patron no later than the 15th day of to figure their domestic production individual, estate, or trust (taxable
the 9th month following the close of gross receipts (DPGR) for that tax income for all other taxpayers) figured
the cooperative's tax year. The year. without the DPAD.
allocated DPAD will also be reported
to patrons that aren't corporations on Alternative minimum tax (AMT). Oil-related QPAI is QPAI
Form 1099-PATR, Taxable For taxpayers other than corporations, attributable to the production, refining,
Distributions Received From the DPAD used to determine regular processing, transportation, or
Cooperatives. tax is also used to determine distribution of oil or gas, or any
alternative minimum taxable income primary product from oil or gas (as
Note. For purposes of section 199, (AMTI). Corporations use AMTI used in section 927(a)(2)(C) before its
patrons of agricultural or horticultural (instead of taxable income) figured repeal).
cooperatives can't include any without the DPAD to figure the
Costs related to transportation.
distributions of qualified payments alternative minimum DPAD used to
When figuring QPAI and oil-related
from the cooperative in the determine AMTI.
QPAI for tax years beginning after
computation of their DPAD. For details on how corporations 2015, only 25% of properly allocated
Allocation of patronage and figure DPAD for AMT, see the costs related to the transportation of
nonpatronage income and Instructions for Form 4626. oil are allocable to DPGR if the
deductions. Cooperatives must Statistical sampling. You are taxpayer is in the trade or business of
calculate the DPAD separately to generally allowed to use statistical refining crude oil and is not a major
determine patronage and sampling for purposes of calculating integrated oil company (as defined in
nonpatronage income or losses for the DPAD. For details about section 167(h)(5)(B) without regard to
purposes of determining unused acceptable statistical sampling clause (iii)).
patronage or nonpatronage losses on methodologies, see Rev. Proc. Primary products from oil.
lines 12 and 13, respectively, of 2007-35 and Rev. Proc. 2011-42. You Primary products from oil are oil and
Schedule G, Form 1120-C. can find Rev. Proc. 2007-35 on all products derived from the
If you have only patronage income page 1349 of I.R.B. 2007-23 at destructive distillation of oil, including
and deductions, complete the Form IRS.gov/pub/irs-irbs/irb07-23.pdf. You volatile products, light oils such as
8903 as described in the instructions. can find Rev. Proc. 2011-42 on motor fuel and kerosene, distillates
However, if you have both patronage page 318 of I.R.B. 2011-37 at such as naphtha, lubricating oils,
and nonpatronage income and IRS.gov/pub/irs-irbs/irb11-37.pdf. greases, and waxes, and residues
deductions, see Line 25 before such as fuel oil.
completing Form 8903.
Primary products from gas.
Expanded affiliated groups Primary products from gas are all gas
(EAGs). All members of an EAG are and associated hydrocarbon

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components from gas or oil wells, 2. Engineering or architectural United States does not include
whether recovered at the lease or services you perform in the United possessions and territories of the
upon further processing, including States in your engineering or United States or the airspace or space
natural gas, condensates, liquefied architectural services trade or over the United States and these
petroleum gases such as ethane, business for the construction of real areas.
propane, and butane, and liquid property in the United States.
Activities in Puerto Rico. For
products such as natural gasoline. 3. Any lease, rental, license, sale, purposes of determining DPGR, the
See Temporary Regulations exchange, or other disposition of the United States includes Puerto Rico for
section 1.927(a)-1T(g)(2) for following. a taxpayer who has gross receipts
additional information. a. Qualifying production property from sources within Puerto Rico that
S corporations and partnerships. you manufacture, produce, grow, or are subject to tax under sections 1 or
S corporations and partnerships that extract in whole or in significant part in 11, but only for the first 12 tax years of
meet specific requirements can the United States. See Qualifying the taxpayer that begin after 2005 and
choose to figure QPAI at the entity Production Property and before 2018.
level and allocate QPAI to Manufacturing, producing, growing, or
Gross receipts. Your gross receipts
shareholders or partners. The extracting, later, for details. are receipts that are recognized under
shareholder or partner then combines b. Any qualified film you produce. your method of accounting for the tax
the allocated portion with QPAI from c. Electricity, natural gas, or year. Gross receipts include the
other sources on Form 8903 to potable water you produce in the following amounts from your trade or
determine the DPAD. S corporations United States. business activities.
or partnerships that aren't eligible to • Total sales (net of returns and
figure QPAI at the entity level must In general, gross receipts derived allowances).
report each shareholder's or partner's from the following activities aren't Amounts received for services, not
•
share of deductions, expenses, or DPGR. including wages received as an
losses on Schedule K-1 with other • Activities not attributable to the employee.
information the shareholder or partner actual conduct of a trade or business. Income from investments and from
•
needs to figure their DPAD. • The sale of food and beverages you incidental or outside sources
prepare at a retail establishment.
QPAI from an estate or trust. An (including sales of business property).
• The lease, rental, or license of
estate or trust will figure its QPAI and • Amounts received that are allocable
property between certain persons
report each beneficiary's share on to the payment of sales tax or other
treated as a single employer.
Schedule K-1 (Form 1041). similar state and local taxes if the tax
• The lease, rental, license, sale, is legally imposed on you.
Cooperatives. Cooperatives figure exchange, or other disposition of land.
QPAI without any deduction for • The transmission or distribution of Gross receipts are generally not
patronage dividends, per-unit retain electricity, natural gas, or potable reduced by the:
allocations, or nonpatronage water. • Cost of goods sold, or
distributions under section 1382(b) or • Advertising and product-placement; • Adjusted basis of property (other
(c). however, see Regulations section than capital assets) sold or otherwise
1.199-3(i)(5)(ii) for exceptions. disposed of if such property is
Domestic Production Gross Customer and technical support, described in section 1221(a)(1)
•
Receipts (DPGR) telephone and other through (5).
Using any reasonable method that is telecommunications services, online Allocation of gross receipts. You
satisfactory to the Secretary based on services (including Internet access generally must allocate your gross
the facts and circumstances, you services, online banking services, and receipts between DPGR and
must determine whether gross providing access to online electronic non-DPGR. Allocate gross receipts
receipts qualify as DPGR on an books, newspapers, and journals), using a reasonable method that
item-by-item basis (and not, for and other similar services; however, accurately identifies gross receipts
example, on a division-by-division, see Regulations section 1.199-3(i)(6) that are DPGR. However, if less than
product line-by-product line, or (iii) for exceptions. 5% of your gross receipts are
transaction-by-transaction basis); non-DPGR, you can treat all of your
however, see Regulations section Activities in the United States.
gross receipts as DPGR. Also, if less
1.199-3(d)(2) for special rules and For purposes of determining DPGR,
than 5% of your gross receipts are
Regulations section 1.199-(3)(d)(3) the United States includes the 50
DPGR, you can treat all of your gross
for an exception. See Regulations states, the District of Columbia, the
receipts as non-DPGR.
section 1.199-(3)(d)(4) for examples. territorial waters of the United States,
and the seabed and subsoil of those For details, see Regulations
DPGR activities. Generally, your submarine areas that are adjacent to section 1.199-1(d).
gross receipts (defined later) derived the territorial waters of the United EAG partnerships. A partnership is
from the following activities are States and over which the United an EAG partnership if a single EAG
DPGR. States has exclusive rights, in owns all the interests in the capital
1. Construction of real property accordance with international law, and profits of the partnership at all
you perform in the United States in with respect to the exploration and times during the tax year. If the
your construction trade or business. exploitation of natural resources. The requirements are met, the EAG

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partnership and all members of the • Machine-readable code for (a) than a sound recording, such as lyrics
EAG are treated as a single taxpayer video games or similar programs, (b) or music composition.
for purposes of determining the equipment that is an integral part of See Regulations section 1.199-3(j)
amount of domestic production gross other property, and (c) typewriters, (4) for more information.
receipts (DPGR). calculators, adding and accounting
Special rules apply to the machines, copiers, duplicating Manufacturing, producing, grow-
attribution of gross receipts (a) to a equipment, and similar equipment, ing, or extracting (MPGE). MPGE
member of the EAG from the even if the program isn't designed to generally include the following trade
disposition of property an EAG operate on a computer as defined in or business activities.
partnership engaged in MPGE, and section 168(i)(2)(B). • Activities related to manufacturing,
(b) to an EAG partnership from the • Computer programs of all classes, producing, growing, extracting,
disposition of property another EAG including operating systems, installing, developing, improving, and
partnership engaged in MPGE, both executive systems, monitors, creating qualifying production
of which are members of the same compilers and translators, assembly property.
EAG. See Regulations section routines, utility programs, and • Making qualifying production
1.199-3(i)(8) for more information, application programs. property (QPP) out of scrap, salvage,
exceptions, and other rules. • Any incidental and ancillary rights or junk material, or from new or raw
that are necessary for the acquisition material by processing, manipulating,
Qualifying Production Property of the title to, the ownership of, or the refining, or changing the form of an
right to use computer software, and article, or by combining or assembling
The following are qualifying that are used only in connection with two or more articles.
production property. that specific software. These • Cultivating soil, raising livestock,
• Tangible personal property. incidental and ancillary rights aren't fishing, and mining minerals.
• Computer software. included in the definition of a • Storage, handling, or other
• Sound recordings. trademark or trade name under processing activities (other than
Tangible personal property. Regulations section 1.197-2(b)(10)(i). transportation activities) in the United
States related to the sale, exchange,
Tangible personal property includes Exception. Computer software or other disposition of agricultural
any tangible property other than land, doesn't include any data or products, provided the products are
buildings (including structural information base unless the data or consumed in connection with, or
components), computer software, information base is in the public incorporated into, manufacturing,
sound recordings, qualified films, domain and is incidental to a producing, growing, or extracting
electricity, natural gas, or potable computer program. QPP, whether or not by the taxpayer.
water. Tangible personal property
also includes any gas (other than Example. If a word processing Generally, the packaging,
natural gas), chemical, and similar program includes a dictionary feature repackaging, labeling, or minor
property, such as steam, oxygen, that may be used to spell-check a assembly of QPP does not qualify as
hydrogen, or nitrogen. document, then the entire program an MPGE activity unless you engage
Machinery, printing presses, (including the dictionary feature) is a in another MPGE activity with respect
transportation and office equipment, computer software program to that QPP. Furthermore, the
refrigerators, grocery counters, testing regardless of the form in which the installation of qualifying production
equipment, display racks and shelves, dictionary feature is maintained or property does not qualify as an MPGE
and neon and other signs that are stored. activity unless you MPGE the
contained in or attached to a building See Regulations section 1.199-3(j) qualifying production property being
constitute tangible personal property. (3) for more information. installed and you have the benefits
and burdens of ownership of the QPP
Sound recordings. Sound
Note. Local law doesn't control under federal income tax principles
recordings include any works that
whether property is tangible personal during the installation period.
result from the fixation of a series of
property. For details, see Regulations
musical, spoken, or other sounds. The
section 1.199-3(e). Your MPGE of
See Regulations section 1.199-3(j) definition of sound recordings is
QPP must be in whole or in significant
(2) for more information. limited to the master copy of the
part within the United States. See
Computer software. In general, recordings (or other copy from which
Regulations section 1.199-3(f) and
computer software includes the the holder is licensed to make and
(g).
following. produce copies), and if the medium
• Any program, routine, or sequence (such as compact discs, tapes, or Qualifying in-kind partnerships.
of machine-readable code that is other phonorecordings) in which the In general, partners of qualifying
designed to cause a computer to sounds may be embodied, is tangible, in-kind partnerships are treated as
perform a desired function or set of then the medium is considered manufacturing, producing, growing, or
functions, and the documentation tangible personal property. extracting the property they receive as
a distribution from the partnership. For
required to describe or maintain that Exception. Sound recordings
purposes of section 199, a qualifying
program or routine. An electronic don't include the creation of
in-kind partnership is a partnership
book online or for download doesn't copyrighted material in a form other
constitute computer software. engaged in any of the following
activities.

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• The extraction, refining, or • Adjusted basis of non-inventory S corporations or partnerships that
processing of oil, natural gas (as property you sold or otherwise aren't eligible to figure QPAI under
described in Regulations section disposed of in your trade or business. those rules must report each
1.199-3(l)(2)), petrochemicals, or shareholder's or partner's share of its
Allocation of cost of goods sold.
products derived from oil, natural gas, deductions, expenses, or losses on
Generally, you must allocate your cost
or petrochemicals, in whole or Schedule K-1 with other information
of goods sold between DPGR and
significant part within the United the shareholder or partner needs to
non-DPGR using a reasonable
States. figure their DPAD.
method. If you use a method to
• The production or generation of
allocate gross receipts between Estates and trusts. An estate or
electricity in the United States.
DPGR and non-DPGR, the use of a trust allocates directly attributable
• The extraction and processing of
different method to allocate cost of trade or business deductions,
minerals (as defined in Regulations
goods sold won't be considered expenses, or losses between DPGR
section 1.611-1(d)(5)) within the
reasonable, unless it is more and non-DPGR under Regulations
United States.
accurate. However, if you qualify to section 1.652(b)-3. An estate or trust
• Any other industry or activity
use the small business simplified that is eligible must use the simplified
designated as an industry or activity of
overall method, you can use it to deduction method to allocate
a qualifying in-kind partnership by
apportion both cost of goods sold and indirectly attributable trade or
publication in the Internal Revenue
other deductions, expenses, and business deductions, expenses, or
Bulletin.
losses between DPGR and losses between DPGR and
For more information on qualifying non-DPGR. For more information non-DPGR. Otherwise, the estate or
in-kind partnerships, see Regulations about this allocation method, see trust uses the section 861 method to
sections 1.199-3(i)(7). For qualifying Small Business Simplified Overall allocate these indirect items.
in-kind partnerships engaged solely in Method, later.
the extraction and processing of Small Business Simplified Overall
For details about allocating cost of
minerals, see Rev. Rul. 2007-30 on goods sold, see Regulations section Method
page 1277 of I.R.B. 2007-21 at
1.199-4.
IRS.gov/pub/irs-irbs/irb07-21.pdf. You generally can use the small
Other Deductions, Expenses, or business simplified overall method to
Qualified Film Losses apportion cost of goods sold and
other deductions, expenses, and
A qualified film is any motion picture When figuring QPAI, other
losses between DPGR and
film, video tape, or live or delayed deductions, expenses, or losses
non-DPGR if you meet any of the
television programming for which 50% include all deductions, expenses, or
following tests.
or more of the total compensation losses from a trade or business other
required to produce the film is paid for than cost of goods sold and employee • You are engaged in the trade or
business of farming and aren't
services performed by actors, business expenses.
required to use the accrual method of
production personnel, directors, and Allocation and apportionment of accounting (see section 447).
producers in the United States. other deductions, expenses, or • Your average annual gross receipts
losses. You must generally use one
A qualified film includes the (defined below) are $5 million or less.
of the following three methods to
copyrights, trademarks, or other • You are eligible to use the cash
allocate and apportion other trade or
intangibles related to the film. Also, a method of accounting under Rev.
business deductions, expenses, or
DPAD can be taken for the production Proc. 2002-28. You can find Rev.
losses between DPGR and
of a qualified film regardless of the Proc. 2002-28 on page 815 of I.R.B.
non-DPGR.
methods and means by which the film 2002-18 at IRS.gov/pub/irs-irbs/
is distributed. • Small business simplified overall irb02-18.pdf.
method. (You must qualify to use this
See section 199(c)(6) and method.) Under the small business simplified
Regulations section 1.199-3(k) for • Simplified deduction method. (You overall method, your total cost of
more information. For special rules must qualify to use this method.) goods sold and other deductions,
related to S corporations, • Section 861 method. expenses, and losses are ratably
partnerships, S corporation However, don't allocate and apportioned between DPGR and
shareholders, and partners apportion a net operating loss non-DPGR based on relative gross
participating in the production of films, deduction or deductions not receipts.
see Film production under S attributable to the conduct of a trade Example. Your total cost of goods
corporations and partnerships, earlier. or business to DPGR under any of the sold and other trade or business
methods.
Cost of Goods Sold deductions, expenses, or losses are
When figuring QPAI, cost of goods S corporations and $400 and don't include a net operating
sold includes the: partnerships. S corporations and loss deduction. You have $1,000 total
• Cost of goods sold to customers, partnerships that meet specific gross receipts and $750 DPGR. Your
and requirements can choose to figure DPGR equal 75% of your total gross
QPAI at the entity level and allocate receipts. Under the small business
the QPAI to shareholders or partners. simplified overall method, you
subtract $300 ($400 × 0.75) of your

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total cost of goods sold and other • It has total cost of goods sold and S corporations and partnerships.
trade or business deductions, deductions (excluding the net An S corporation or partnership (other
expenses, or losses from your DPGR operating loss deduction) added than a qualifying in-kind partnership or
to figure your QPAI, which is $450 together of $5 million or less. expanded affiliated group partnership)
($750 - $300). • It has DPGR. can choose to use the simplified
Average annual gross receipts. • If a partnership, it doesn't have a deduction method to figure QPAI at
partner that is an ineligible partnership
For this purpose, your average annual the entity level and allocate that QPAI
(qualifying in-kind partnerships or
gross receipts are your average to shareholders or partners if it meets
expanded affiliated group
annual gross receipts for the the requirements of an eligible widely
partnerships).
preceding 3 tax years. If your held pass-through entity. A
business hasn't been in existence for Expanded affiliated groups. For shareholder or partner who is
3 tax years, base your average on the additional rules that apply to allocated QPAI from an eligible widely
period it has existed. Include any expanded affiliated groups, see held pass-through entity must report
short tax years by annualizing the Regulations section 1.199-4(f)(4). that QPAI on line 7.
short tax year's gross receipts by (a) For a definition of a qualifying
Oil-related production activities. If
multiplying the gross receipts for the you have oil-related QPAI, and you in-kind partnership, see Regulations
short period by 12, and (b) dividing choose to use the small business section 1.199-3(i)(7). For a definition
the result by the number of months in of an expanded affiliated group
simplified overall method, you must
the short period. partnership, see Regulations section
allocate part of these costs to DPGR
Estates and trusts. Estates and from oil-related production activities to 1.199-3(i)(8).
trusts can't use the small business determine oil-related QPAI. See An S corporation or partnership is
simplified overall method. Line 4, later. an eligible widely held pass-through
S corporations and partnerships. For details about the small entity if it meets each of the following
An S corporation or partnership (other business simplified overall method, requirements for its current tax year.
than a qualifying in-kind partnership or see Regulations section 1.199-4(f). • Either of the two tests discussed
earlier under Simplified Deduction
expanded affiliated group partnership)
Method.
can choose to use the small business Simplified Deduction Method
• It has total cost of goods sold and
simplified overall method to figure You generally can use the simplified deductions added together of $100
QPAI at the entity level and allocate deduction method to apportion other million or less.
that QPAI to shareholders or partners deductions, expenses, and losses • It has DPGR.
if it meets the requirements of an (but not cost of goods sold) between • On every day during the current tax
eligible small pass-through entity. A DPGR and non-DPGR if you meet year, all of its shareholders or partners
shareholder or partner who is either of the following tests. are individuals, estates, or trusts
allocated QPAI from an eligible small • Your total trade or business assets described (or treated as described) in
pass-through entity must report that at the end of your tax year are $10 section 1361(c)(2).
QPAI on line 7. million or less. • On every day during the current tax
For a definition of a qualifying • Your average annual gross receipts year, no shareholder or partner owns,
in-kind partnership, see Regulations (defined above) are $100 million or alone or combined with the ownership
section 1.199-3(i)(7). For a definition less. interests of all related persons, more
of an expanded affiliated group than 10% of (a) total shares of the S
partnership, see Regulations section Under the simplified deduction corporation or (b) the profits or capital
1.199-3(i)(8). method, your other trade or business interests in the partnership.
An S corporation or partnership is deductions, expenses, or losses are
an eligible small pass-through entity if ratably apportioned between DPGR Estates and trusts. If eligible by
it meets each of the following and non-DPGR based on relative meeting one of the two tests
requirements for the current tax year. gross receipts. described earlier, an estate or trust
must use the simplified deduction
• It satisfies one of the following Example. Your total other trade or method to allocate its indirectly
requirements: (a) it has average business deductions, expenses, or attributable trade or business
annual gross receipts for the 3 tax losses are $400 and don't include a deductions, expenses, or losses
years preceding the current tax year net operating loss. You have $240 of between DPGR and non-DPGR. All
of $5 million or less, (b) it is engaged cost of goods sold allocable to DPGR. estates and trusts must allocate
in the trade or business of farming and You have $1,000 total gross receipts directly attributable deductions,
isn't required to use the accrual and $600 DPGR. Your DPGR equal expenses, or losses between DPGR
method of accounting, or (c) it is 60% of your total gross receipts. and non-DPGR under Regulations
eligible to use the cash method of Under the simplified deduction section 1.652(b)-3.
accounting under Rev. Proc. 2002-28 method, you subtract $240 ($400 ×
(that is, it has average annual gross 0.60) of your total other trade or Expanded affiliated groups. For
receipts of $10 million or less and isn't business deductions, expenses, or additional rules that apply to
excluded from using the cash method losses from your DPGR to figure your expanded affiliated groups, see
under section 448 of the Internal QPAI, which is $120 ($600 - $240 - Regulations section 1.199-4(e)(4).
Revenue Code). $240).

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Oil-related production activities. If partnership, see Regulations section section 861 method to allocate and
you have oil-related QPAI, and you 1.199-3(i)(8). apportion its indirectly attributable
choose to use the simplified An eligible 861 partnership must trade or business deductions,
deduction method, you must allocate meet the following requirements for its expenses, or losses between DPGR
part of these costs to DPGR from current tax year. and non-DPGR. All estates and trusts
oil-related production activities to • It has at least 100 partners on any must allocate directly attributable
determine oil-related QPAI. See day during the partnership's tax year. deductions, expenses, or losses
Line 3, later. • At least 70% of the partnership is between DPGR and non-DPGR under
owned, at all times during its tax year, Regulations section 1.652(b)-3.
Section 861 Method by qualifying partners (defined next). Oil-related production activities. If
You don't have to meet any tests to • It has DPGR. you have oil-related QPAI, apply the
use the section 861 method. Under Qualifying partner. A qualifying rules of section 861 to determine the
the section 861 method, you generally partner is a partner that, on each day amount of other trade or business
must apply the rules of the section during the partnership's tax year that deductions, expenses, or losses to
861 regulations to allocate and the partner owns an interest in the deduct for purposes of determining
apportion other trade or business partnership: oil-related QPAI.
deductions, expenses, or losses • Is not a general partner or a
between DPGR and non-DPGR. managing member of a partnership Adjusted Gross or Taxable
Section 199 is treated as an organized as a limited liability Income
“operative section” described in company, Your allowable DPAD generally can't
Regulations section 1.861-8(f). • Doesn't materially participate be more than 9% of your adjusted
(discussed later) in the activities of the gross income if you are an individual,
For details, see Regulations partnership, estate, or trust (taxable income for all
section 1.199-4(d). • Doesn't hold, alone or combined other taxpayers) figured without the
with the interests of all related DPAD. If you don't have adjusted
For guidance on automatic persons (defined next), 5% or more of gross or taxable income, you
approval to change certain elections the profits or capital interests in the generally aren't allowed a DPAD.
relating to the apportionment of partnership,
interest expense and research and Is not an ineligible entity (qualifying Note. Although patrons without
•
experimentation expenditures, see in-kind partnership or expanded adjusted gross or taxable income can
Rev. Proc. 2006-42. You can find affiliated group partnership). claim a DPAD, the DPAD can't create
Rev. Proc. 2006-42 on page 931 of or increase a net operating loss under
I.R.B. 2006-47 at IRS.gov/pub/irs-irbs/ Related persons. For purposes of section 172(d). However, you don't
irb06-47.pdf. determining whether a partner is a need taxable income to claim a DPAD
qualifying partner, persons are related
S corporations. An S corporation you are allocated as a member of an
if they meet the requirements of
can't use the section 861 method to Expanded Affiliated Group (EAG), and
sections 267(b) or 707(b),
figure QPAI. Unless it is eligible to use the DPAD can create or increase a
disregarding sections 267(e)(1) and
the small business simplified overall net operating loss under Regulations
(f)(1)(A).
method or simplified deduction section 1.199-7(c)(2).
method, an S corporation must report Material participation. A Agricultural and horticultural co-
each shareholder's share of its qualifying partner can't materially operatives. For this purpose, figure
deductions, expenses, or losses on participate in the activities of the taxable income without taking into
Schedule K-1 (Form 1120S) that the partnership. See section 5.05 of Rev. account any allowable deduction for
shareholder needs to figure their Proc. 2007-34 for the definition of patronage dividends, per-unit retain
DPAD. material participation. allocations, or nonpatronage
Partnerships. A partnership (other Non-qualifying partners. An distributions.
than a qualifying in-kind partnership or eligible 861 partnership can't allocate Estates and trusts. See Line 11,
expanded affiliated group partnership) QPAI to non-qualifying partners (see later, to figure adjusted gross income.
can choose to use the 861 method to Qualifying partner, earlier). Instead,
figure QPAI at the entity level and the partnership must report each Unrelated business taxable in-
allocate that QPAI to qualifying non-qualifying partner's share of come (UBTI). The allowable DPAD
partners (defined later) if it meets the deductions, expenses, or losses on of an organization taxed on its UBTI
requirements of an eligible 861 Schedule K-1 that the partner needs under section 511 generally can't be
partnership. A partner who is to figure their DPAD. The partnership more than 9% of its UBTI figured
allocated QPAI from an eligible 861 items allocated to non-qualifying without the DPAD.
partnership must report that QPAI on partners must be excluded for
line 7. purposes of figuring QPAI at the Form W-2 Wages
For a definition of a qualifying partnership level. Your allowable DPAD generally can't
be more than 50% of the Form W-2
in-kind partnership, see Regulations Estates and trusts. An estate or wages you paid to your employees
section 1.199-3(i)(7). For a definition trust that can't use the simplified that are properly allocable to DPGR
of an expanded affiliated group deduction method must use the (including Form W-2 wages allocated

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to you on a Schedule K-1). If you regard to section 3401(a)(8), but only Acquisition or disposition of a
didn't pay Form W-2 wages, you during the first 12 tax years of the trade or business. If you acquired or
generally aren't allowed a DPAD. taxpayer that begin after 2005 and disposed of a trade or business that
However, you don't need Form W-2 before 2018. causes you and another employer to
wages to claim a DPAD you are pay W-2 wages to employees of the
Form W-2 wages paid to produce a
allocated as a: acquired or disposed of trade or
qualified film. Form W-2 wages
• Patron of an agricultural or business during the calendar year,
include compensation for services
horticultural cooperative, or then the W-2 wages for the calendar
performed in the United States by
• Member of an expanded affiliated year of the acquisition or disposition
actors, production personnel,
group. are allocated between each employer
directors, and producers to produce a
Note. When figuring your DPAD, the qualified film. See Qualified Film, based on the period that the
limit equal to 50% of Form W-2 wages earlier, for more information. employees of the acquired or
disposed of trade or business were
is based only on Form W-2 wages Figuring Form W-2 Wages Used employed by each employer. If you
properly allocable to DPGR. To Figure the 50% Limit have a short tax year that doesn’t
Form W-2 wages from an S corpo- You figure Form W-2 wages used to include a calendar year ending within
ration or partnership. S figure the 50% limit in two steps. First, your short tax year, see Short tax
corporations and partnerships that you must determine the amount of year, earlier.
meet specific requirements can wages to classify as Form W-2 wages Non-duplication rule. Amounts that
choose to figure Form W-2 wages at under Regulations section 1.199-2(e) are treated as Form W-2 wages for a
the entity level and report the (1). Second, you must figure Form tax year under any method can't be
allocated portion of Form W-2 wages W-2 wages that are properly allocable treated as Form W-2 wages for any
on Schedule K-1 to the S corporation to DPGR. other tax year. Also, an amount can't
shareholder or partner who then
be treated as Form W-2 wages by
combines the allocated portion with Step 1. Figuring Form W-2 Wages more than one taxpayer.
Form W-2 wages from other sources
on Form 8903 to determine the You can use one of the following three Unmodified box method. Under the
DPAD. methods to figure your Form W-2 unmodified box method, Form W-2
wages. wages are the smaller of:
If the S corporation or partnership Unmodified box method.
•
1. The sum of the amounts
meets the requirements to be Modified box 1 method.
•
reported in box 1 of the relevant
classified as one of the eligible entities Tracking wages method.
•
listed below, it can figure Form W-2 Forms W-2, or
wages at the entity level and allocate After you figure Form W-2 wages, 2. The sum of the amounts
Form W-2 wages to S corporation see Step 2, later, to determine the reported in box 5 of the relevant
shareholders or partners. Form W-2 wages to report on line 16 Forms W-2.
• Eligible small pass-through entity. of Form 8903.
See S corporations and partnerships, Modified box 1 method. Under the
under Small Business Simplified Relevant Forms W-2. To figure your modified box 1 method, Form W-2
Overall Method, earlier, for the Form W-2 wages, generally use the wages are figured as follows.
requirements. sum of the amounts you properly
• Eligible widely held pass-through report for each employee on Form 1. Add the amounts reported in
entity. See S corporations and W-2, Wage and Tax Statement, for box 1 of the relevant Forms W-2.
partnerships, under Simplified the calendar year ending with or 2. Add all the amounts described
Deduction Method, earlier, for the within your tax year. However, don't below and included in box 1 of the
requirements. use any amounts reported on a Form relevant Forms W-2.
• Eligible 861 partnership. See W-2 filed with the Social Security a. Amounts not considered wages
Partnerships, under Section 861 Administration more than 60 days for federal income tax withholding
Method, earlier, for the requirements. after its due date (including purposes.
extensions).
Form W-2 wages from an estate or b. Supplemental unemployment
trust. An estate or trust generally will Short tax year. If you have a short compensation benefits.
figure its Form W-2 wages and tax year, you generally will use the c. Sick pay or annuity payments
apportion them between the sum of the amounts you properly from which the recipient requested
beneficiary and the fiduciary (and report for each employee on Form federal income tax withholding.
among the beneficiaries) and report W-2 for the calendar year ending with
3. Subtract (2) from (1).
each beneficiary's share on or within that short tax year. However,
Schedule K-1 (Form 1041). if you have a short tax year that 4. Add together any amounts
doesn't include a calendar year reported in box 12 of the relevant
Form W-2 wages for services per- ending within that short tax year, then Forms W-2 that are properly coded D,
formed in Puerto Rico. Taxpayers wages you properly report on Form E, F, G, or S.
that determine DPGR under section W-2 which you paid during the short 5. Add (3) and (4).
199(d)(8)(A), figure Form W-2 wages tax year are treated as W-2 wages for
by including wages paid for services that short tax year.
performed in Puerto Rico without

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Tracking wages method. Under the Regulations section 1.199-4(e), you activities) on lines 1 through 10,
tracking wages method, Form W-2 determine the amount of wages column (b).
wages are figured as follows. properly allocable to DPGR by
multiplying the amount of wages for Line 1
1. Add the amounts reported in
the tax year by the ratio of your wage
box 1 of the relevant Forms W-2 that Domestic Production
expense included in calculating QPAI
are also wages for federal income tax Gross Receipts (DPGR)
for the tax year to your total wage
withholding purposes. Enter your DPGR (defined earlier in
expense used in calculating your
2. Add any amounts reported in taxable income (or adjusted gross the General Instructions under
box 1 of the relevant Forms W-2 that income) for the tax year without Domestic Production Gross
are both: regard to any wage expenses Receipts).
a. Wages for federal income tax disallowed by sections 465, 469,
withholding purposes, and 704(d), or 1366(d). Line 2
b. Supplemental unemployment If you use the section 861 method Allocable Cost of Goods
compensation benefits. or the simplified deduction method, Sold
3. Subtract (2) from (1). you must use the same expense Enter your cost of goods sold
allocation and apportionment allocable to DPGR on line 2 unless
4. Add together any amounts methods that you use to determine you are using the small business
reported in box 12 of the relevant QPAI to allocate and apportion wage simplified overall method. If you are
Forms W-2 that are properly coded D, expense for purposes of the safe using the small business simplified
E, F, G, or S. harbor. overall method, skip line 2, and go to
5. Add (3) and (4). Line 4.
Wage expense included in cost
of goods sold. When figuring the For more information about
Step 2. Form W-2 Wages
ratio of your wage expense included allocating costs of goods sold, see
Allocable to DPGR in calculating QPAI for the tax year to Cost of Goods Sold, earlier, in the
After you calculate Form W-2 wages, your total wage expense used in General Instructions. See Small
as discussed in Step 1, you must calculating your adjusted gross Business Simplified Overall Method,
figure Form W-2 wages that are income or taxable income (as the earlier in the General Instructions, for
properly allocable to DPGR. You case may be) for the tax year, more information about using this
report the Form W-2 wages that are determine the wage expense included method to allocate cost of goods sold
properly allocable to DPGR on line 16 in cost of goods sold using any and other deductions or losses to
of Form 8903. reasonable method based on all of the DPGR.
facts and circumstances. For
You can figure Form W-2 wages example, it may be reasonable to use Line 3
that are properly allocable to DPGR (a) the amount of direct labor included Allocable Deductions and
under one of the following methods. in cost of goods sold or (b) section
Losses
• Small business simplified overall 263A labor costs (as defined in
method safe harbor. Regulations section 1.263A-1(h)(4) Enter your other deductions or losses
• Wage expense safe harbor. (ii)) included in cost of goods sold. properly allocable to DPGR on line 3
unless you are using the small
• Any other reasonable method More information. For more business simplified overall method. If
based on all the facts and information on figuring your Form W-2 you are using the small business
circumstances. wages, see Regulations section simplified overall method, skip line 3,
Small business simplified overall 1.199-2 and Rev. Proc. 2006-47. You and go to Line 4.
method safe harbor. If you use the can find Rev. Proc. 2006-47 on
small business simplified overall page 869 of I.R.B. 2006-45 at If you are using the simplified
method to allocate costs between IRS.gov/pub/irs-irbs/irb06-45.pdf. deduction method, enter on line 3 the
other deductions or losses you ratably
DPGR and non-DPGR (see Small For more information on figuring apportion to DPGR. See Simplified
Business Simplified Overall Method, Form W-2 wages properly allocable to Deduction Method, earlier in the
earlier), you can use the small DPGR, see Regulations section General Instructions, for more
business simplified overall method 1.199-2(e)(2). information about this method.
safe harbor to determine the amount
of Form W-2 wages allocable to If you are using the section 861
DPGR. Under this safe harbor Specific Instructions method, enter on line 3 the other
method, the amount of Form W-2 Complete lines 1 through 10, deductions or losses you allocate or
apportion to DPGR. See Section 861
wages that is properly allocable to ! column (a), only if you have
DPGR equals the proportion of DPGR CAUTION oil-related production Method, earlier in the General
to total gross receipts. activities. All others, do not complete Instructions, for more information
Wage expense safe harbor. If you lines 1 through 9, column (a), and about this method.
are using either the section 861 enter zero on line 10a. Oil-related production activities. If
method of cost allocation under you use the simplified deduction
Regulations section 1.199-4(d) or the Enter amounts for all activities method to calculate the other
simplified deduction method under (including oil-related production deductions or losses reported on
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line 3, column (b), you must make an and trusts, earlier under Definitions Note. If you have extraterritorial
additional calculation to determine the and Special Rules. income (ETI), figure taxable income
amount to report on line 3, column (a). without regard to any claimed ETI
Multiply the amount reported on line 3, Line 10a Oil-Related exclusions.
column (b), by the ratio of oil-related Qualified Production See Regulations section 1.199-1(b)
DPGR reported on line 1, column (a), (1) for more information.
divided by DPGR from all activities Activities Income
reported on line 1, column (b). Enter Add lines 1 through 9, column (a), to
the result on line 3, column (a). Don't determine oil-related QPAI. If you Line 14a
reduce the amount reported on line 3, don't have oil-related QPAI, don't If you have oil-related qualified
column (b), by this amount. complete lines 1 through 9, column production income, use line 14a to
(a), and enter zero on line 10a. determine the least of the following
If you use the section 861 method, amounts.
apply the rules of section 861 to Line 11 • Oil-related QPAI—line 10a,
determine the amount to report on • QPAI—line 10b, or
line 3, column (a). Income Limitation
• Adjusted gross income for an
Individuals. Enter your adjusted individual, estate, or trust (taxable
Line 4 gross income from line 7 of Form income for all other
Small Business Simplified 1040 figured without the DPAD. taxpayers)—line 11.

Overall Method Olympic and Paralympic medals All others, enter zero on line 14a.
Enter the amount of cost of goods and USOC prize money. For
sold and other deductions or losses purposes of figuring your DPAD, your Line 14b Reduction for
you ratably apportion to DPGR using adjusted gross income doesn't
the small business simplified overall include the value of any medal Oil-Related Qualified
method. awarded in, or any prize money Production Activities
Oil-related production activities. If received from the United States Income
you use the small business simplified Olympic Committee on account of, If you have oil-related qualified
overall method to calculate the cost of competition in the Olympic Games or production income, use line 14b to
goods sold and other deductions, Paralympic Games. If line 7 of your reduce your DPAD by 3% of the
expenses, and losses reported on Form 1040 includes these amounts, amount reported on line 14a.
line 4, column (b), you must make an then reduce your adjusted gross
additional calculation to determine the income by them before entering it on All others, enter zero on line 14b.
amount to report on line 4, column (a). line 11.
Multiply the amount reported on line 4, Corporations. Enter your taxable Line 16
column (b), by the ratio of oil-related income from the applicable line of Form W-2 Wages
DPGR reported on line 1, column (a), your tax return (for example, line 30 of Enter your Form W-2 wages that are
divided by DPGR from all activities Form 1120) figured without the DPAD. properly allocable to DPGR
reported on line 1, column (b). Enter (discussed earlier under Form W-2
the amount on line 4, column (a). Members of EAGs. See Line 24, Wages). Don't include Form W-2
later.
Don't reduce the amount reported on wages you must report on line 17.
line 4, column (b), by this amount. Agricultural and horticultural co-
operatives. Enter your taxable Line 17
Line 7 income figured without the DPAD or Beneficiaries of estates and trusts,
Beneficiaries of estates and trusts, the deductions for patronage partners, and S corporation
partners, and S corporation dividends, per-unit retain allocations, shareholders report the Form W-2
shareholders report the QPAI and nonpatronage distributions under wages distributed from estates or
distributed from estates or trusts, and section 1382(b) or (c). trusts, and certain partnerships or S
certain partnerships or S corporations Estates and trusts. Enter your corporations on line 17. The Form
on line 7. The QPAI should be adjusted gross income figured without W-2 wages should be reported to you
reported to you on Schedule K-1 for the DPAD. See the Instructions for on the Schedule K-1 for Forms 1041,
Forms 1041, 1065, or 1120S. See the Form 1041 to figure adjusted gross 1065, or 1120S. See the related
related Schedule K-1 and its income. Use the method discussed Schedule K-1 and its instructions for
instructions for more information. under How to figure AGI for estates more information.
and trusts, under Line 15a–Other
Line 9 Deductions. Line 19
Estates and trusts must use Estates and trusts must use
Regulations section 1.652(b)-3 to Unrelated business taxable in- Regulations section 1.652(b)-3 to
allocate QPAI to beneficiaries if DNI is come (UBTI). An organization taxed allocate Form W-2 wages to
distributed or required to be on its UBTI under section 511 enters beneficiaries if DNI is distributed or
distributed to beneficiaries. Report the its UBTI from line 38 of Form 990-T required to be distributed to
amount of QPAI allocated to figured without the DPAD. beneficiaries. Report the amount of
beneficiaries on line 9. See Estates the Form W-2 wages allocated to
beneficiaries on line 19. See Estates

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

Instructions for Form 8903 (Rev. 12-2018) -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. 12-2018)

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