Instructions for Form 8903

(Rev. December 2019)

Domestic Production Activities Deduction

Department of the Treasury

Internal Revenue Service

Section references are to the Internal 

Revenue Code unless otherwise noted.

Future Developments

For the latest information about 

developments related to Form 8903 

and its instructions, such as 

legislation enacted after they were 

published, go to IRS.gov/Form8903.

Future revisions of Form 8903. 

The IRS will revise the December 

2018 version of Form 8903 only when 

necessary. Continue to use the 2018 

version of Form 8903 for tax years 

beginning after 2017 until a new 

revision is issued.

What's New

Domestic production activities deduction (DPAD). DPAD under 

former section 199 has been repealed 

for tax years beginning after 2017. 

Taxpayers using Form 8903 to 

compute DPAD for tax years, or items 

arising from tax years, prior to repeal 

should use the Instructions for Form 

8903 dated December 2018.

For specified agricultural or 

horticultural cooperatives (specified 

cooperatives), a deduction under 

section 199A(g) for income 

attributable to domestic production 

activities is available for tax years 

beginning after 2017. Specified 

cooperatives may use Form 8903, as 

applicable, to calculate the section 

199A(g) deduction.

For further guidance, until final 

regulations are published in the 

Federal Register, taxpayers may 

generally rely on the Proposed 

Regulations (REG-118425-18), 

published June 19, 2019, provided 

the taxpayer applies the rules in their 

entirety and in a consistent manner. 

For purposes of the W-2 Wage 

Limitation, also see Notice 2019-27, 

2019-31 IRB, page 484 available at 

IRS.gov/IRB/2019-31.

General Instructions

Purpose of Form

Use Form 8903 to figure your 

domestic production activities 

deduction (DPAD).

Your DPAD is generally 9% of the 

smaller of:

1. Your qualified production 

activities income (QPAI), or

2. Your adjusted gross income for 

an individual, estate, or trust (taxable 

income for all other taxpayers) figured 

without the DPAD.

Reduced DPAD for oil-related 

QPAI. A taxpayer with oil-related 

QPAI also must reduce the DPAD by 

3% of the least of the following 

amounts.

• Oil-related QPAI.

• QPAI.

• Adjusted gross income for an 

individual, estate, or trust (taxable 

income for all other taxpayers) figured 

without DPAD.

DPAD limited to wages paid. Your 

DPAD generally can't be more than 

50% of the Form W-2 wages you paid 

to your employees that are properly 

allocable to domestic production 

gross receipts (including Form W-2 

wages allocated to you on a 

Schedule K-1).

Who Must File

DPAD for income attributable to 

domestic production activities before 2018. Individuals, corporations, 

cooperatives, estates, and trusts use 

Form 8903 to figure their allowable 

DPAD from certain trade or business 

activities.

Shareholders of S corporations and 

partners include information provided 

by the S corporation or partnership 

when figuring their allowable DPAD. 

Beneficiaries of an estate or trust 

include information provided by the 

estate or trust when figuring their 

allowable DPAD. Patrons of certain 

agricultural or horticultural 

cooperatives may be allocated a 

share of the cooperative's DPAD to 

include on Form 8903.

Married individuals filing a joint 

income tax return figure the deduction 

on one Form 8903 using the 

applicable items of both spouses.

Note. Unless you were allocated a 

share of a cooperative's DPAD or you 

are a member of an expanded 

affiliated group (EAG), you won't be 

allowed a DPAD unless you can enter 

on Form 8903 a positive amount for all 

three of the following.

• Qualified production activities 

income (QPAI).

• Adjusted gross income for an 

individual, estate, or trust (taxable 

income for all other taxpayers).

• Form W-2 wages you paid to your 

employees. If you didn't pay any Form 

W-2 wages (or have Form W-2 wages 

allocated to you on a Schedule K-1), 

you can't claim a DPAD.

For details, see the discussions of 

these three items, later.

DPAD for income attributable to 

domestic production activities after 2017. DPAD has been repealed 

for tax years beginning after 2017. 

Don’t use Form 8903 to claim DPAD 

for 2018 or later years unless:

1. Your tax year began before 

January 1, 2018,

2. You are a shareholder in an S 

corporation or partner in a partnership 

and the entity has a tax year that 

began before January 1, 2018,

3. You are a beneficiary of an 

estate or trust and the estate or trust 

has a tax year that began before 

January 1, 2018,

4. You are a patron of an 

agricultural or horticultural cooperative 

with a tax year that began before 

January 1, 2018.

Specified cooperatives’ DPAD after 2017. For tax years beginning on 

or after January 1, 2018, specified 

agricultural or horticultural 

cooperatives to which part I of 

subchapter T applies may qualify for a 

deduction under section 199A(g).

Dec 20, 2019 Cat. No. 39878Q
For agricultural or horticultural 

cooperatives’ utilizing Form 8903 to 

compute a deduction under section 

199A(g), write “SPECIFIED 

COOPERATIVE DPAD” across the 

top of Form 8903. The Form 8903 

must be attached to the cooperative’s 

return.

Definitions and Special 

Rules

Trade or business. QPAI and Form 

W-2 wages are figured by only taking 

into account items that are attributable 

to the actual conduct of a trade or 

business. An activity qualifies as a 

trade or business if your primary 

purpose for engaging in the activity is 

for income or profit and you are 

involved in the activity with continuity 

and regularity. For example, a 

sporadic activity or a hobby doesn't 

qualify as a trade or business.

Coordination with other deductions. Expenses that otherwise 

would be taken into account for 

purposes of figuring the DPAD are 

only taken into account if and to the 

extent the losses and deductions from 

all of your activities aren't disallowed 

by a provision of the Internal Revenue 

Code, including the following.

• Basis limits on a partner's share of 

partnership losses.

• Basis limits on a shareholder's 

share of S corporation losses.

• At-risk rules.

• Passive activity rules.

If only a portion of your losses or 

deductions are allowed in the current 

tax year, a proportionate share of the 

losses or deductions that reflect 

expenses allocated to your gross 

receipts from qualified production 

activities, after applying the provisions 

discussed earlier, is taken into 

account for purposes of figuring the 

DPAD for the current tax year. If any 

of the losses or deductions disallowed 

for tax years beginning after 2004 are 

allowed in a later tax year, a 

proportionate share of the expenses 

reflected in those losses or 

deductions is taken into account in 

figuring the DPAD in the later tax year.

A net operating loss under section 

172 generally is figured without the 

section 199 deduction.

S corporations and partnerships. 

The DPAD is applied at the 

shareholder or partner level. Certain S 

corporations and partnerships can 

figure QPAI and Form W-2 wages at 

the entity level and allocate and report 

these amounts to shareholders and 

partners. See Qualified Production 

Activities Income (QPAI) and Form 

W-2 Wages for more information.

All other S corporations and 

partnerships need to provide each 

shareholder or partner with 

information the shareholder or partner 

needs to figure the DPAD.

Film production. S corporation 

shareholders or partners that own 

20% or more (directly or indirectly) of 

the capital interests in the S 

corporation or the partnership are 

treated as having engaged directly in 

any film produced by the S 

corporation or partnership, and the S 

corporation or partnership is treated 

as having engaged directly in any film 

produced by the S corporation 

shareholder or partner. See section 

199(d)(1)(A)(iv) for more information.

Estates and trusts. Generally, an 

estate or trust will figure its:

• QPAI (which may be less than 

zero), and

• Form W-2 wages it paid to its 

employees (including Form W-2 

wages allocated to it on a 

Schedule K-1).

These items are then allocated among 

the estate or trust and its beneficiaries 

based on the relative proportion of the 

estate's or trust's distributable net 

income (DNI) for the tax year that is 

distributed or required to be 

distributed to the beneficiary or 

retained by the estate or trust. If the 

estate or trust has no DNI for the tax 

year, QPAI and Form W-2 wages are 

allocated entirely to the estate or trust.

Although estates and trusts actually 

allocate their QPAI and Form W-2 

wages to beneficiaries as discussed 

earlier, when completing Form 8903 

they must reduce the amounts 

reported on lines 8 and 18 to reflect 

the portion of those amounts that 

were allocated to beneficiaries as 

QPAI or Form W-2 wages. For details, 

see Line 9, later.

Agricultural and horticultural cooperatives. Generally, an 

agricultural or horticultural cooperative 

can choose to allocate all, some, or 

none of its allowable DPAD (but not 

QPAI) to its patrons.

An agricultural or horticultural 

cooperative is an organization 

described in section 1381 that is 

engaged in:

• Manufacturing, producing, growing, 

or extracting (MPGE) in whole or 

significant part any agricultural or 

horticultural product, or

• Marketing agricultural or 

horticultural products that its patrons 

have MPGE.

Agricultural or horticultural products 

for this purpose include fertilizer, 

diesel fuel, and other supplies used in 

agricultural or horticultural production. 

An organization engaged in marketing 

agricultural or horticultural products is 

treated as having MPGE in whole or in 

significant part any qualifying 

production property marketed by the 

organization that its patrons have 

MPGE.

Allocation of cooperative DPAD. 

Qualified payments are the patronage 

dividends and per-unit retain 

allocations paid to patrons on which 

the cooperative computed its DPAD. 

A patron who receives a qualified 

payment can be allocated any portion 

of the DPAD allowed with respect to 

the portion of the QPAI to which such 

payment is attributable. The 

cooperative must identify the portion 

of its DPAD allocated to a patron in a 

written notice mailed to the patron no 

later than the 15th day of the 9th 

month following the close of the 

cooperative's tax year. The qualified 

payments and allocated DPAD will 

also be reported to patrons that aren't 

corporations on Form 1099-PATR, 

Taxable Distributions Received From 

Cooperatives.

Note. For purposes of section 199, 

patrons of agricultural or horticultural 

cooperatives can't include any 

distributions of qualified payments 

from the cooperative in the 

computation of their DPAD.

Allocation of patronage and 

nonpatronage income and 

deductions. Cooperatives must 

calculate the DPAD separately to 

determine patronage and 

nonpatronage income or losses for 

purposes of determining unused 

patronage or nonpatronage losses on 

lines 12 and 13, respectively, of 

Schedule G, Form 1120-C.

If you have only patronage income 

and deductions, complete the Form 

-2- Instructions for Form 8903 (Rev. 12-2019)
8903 as described in the instructions. 

However, if you have both patronage 

and nonpatronage income and 

deductions, see Line 25 before 

completing Form 8903.

Expanded affiliated groups 

(EAGs). All members of an EAG are 

treated as a single corporation to 

figure their DPAD. The DPAD is 

allocated among the members of the 

group in proportion to each member's 

respective amount (if any) of QPAI. 

See Line 24 before completing Form 

8903.

An EAG is an affiliated group as 

defined in section 1504(a) 

determined:

• By substituting "more than 50%" for 

"at least 80%" each place it appears, 

and

• Without regard to paragraphs (2) 

and (4) of section 1504(b).

A corporation's status as a member 

of an EAG is determined on a daily 

basis. Also, if a corporation joins or 

leaves an EAG, its status as a 

member of the EAG is determined at 

the end of the day on which it joins or 

leaves the EAG.

If all the capital and profits interests 

of a partnership are owned by 

members of a single EAG at all times 

during the partnership's tax year, the 

partnership and all members of the 

group are treated as a single taxpayer 

to figure their domestic production 

gross receipts (DPGR) for that tax 

year.

Alternative minimum tax (AMT). 

For taxpayers other than corporations, 

the DPAD used to determine regular 

tax is also used to determine 

alternative minimum taxable income 

(AMTI). Corporations use AMTI 

(instead of taxable income) figured 

without the DPAD to figure the 

alternative minimum DPAD used to 

determine AMTI.

For details on how corporations 

figure DPAD for AMT, see the 

Instructions for Form 4626.

Statistical sampling. You are 

generally allowed to use statistical 

sampling for purposes of calculating 

the DPAD. For details about 

acceptable statistical sampling 

methodologies, see Rev. Proc. 

2007-35 and Rev. Proc. 2011-42. You 

can find Rev. Proc. 2007-35 on 

page 1349 of I.R.B. 2007-23 at 

IRS.gov/pub/irs-irbs/irb07-23.pdf. You 

can find Rev. Proc. 2011-42 on 

page 318 of I.R.B. 2011-37 at 

IRS.gov/pub/irs-irbs/irb11-37.pdf.

Qualified Production 

Activities Income (QPAI)

Your allowable DPAD generally can't 

be more than 9% of your QPAI. If you 

don't have QPAI, you generally aren't 

allowed a DPAD. However, you don't 

need QPAI to claim a DPAD you are 

allocated as a patron of an agricultural 

or horticultural cooperative.

Figuring QPAI. QPAI is the excess 

(if any) of:

1. Domestic production gross 

receipts (DPGR), over

2. The sum of:

a. Cost of goods sold allocable to 

DPGR, and

b. Other expenses, losses, or 

deductions (other than the DPAD) 

which are properly allocable to DPGR.

Oil-related QPAI. A taxpayer with 

oil-related QPAI must reduce the 

DPAD by 3% of the least of the 

following amounts.

• Oil-related QPAI.

• QPAI.

• Adjusted gross income for an 

individual, estate, or trust (taxable 

income for all other taxpayers) figured 

without the DPAD.

Oil-related QPAI is QPAI 

attributable to the production, refining, 

processing, transportation, or 

distribution of oil or gas, or any 

primary product from oil or gas (as 

used in section 927(a)(2)(C) before its 

repeal).

Costs related to transportation. 

When figuring QPAI and oil-related 

QPAI for tax years beginning after 

2015, only 25% of properly allocated 

costs related to the transportation of 

oil are allocable to DPGR if the 

taxpayer is in the trade or business of 

refining crude oil and is not a major 

integrated oil company (as defined in 

section 167(h)(5)(B) without regard to 

clause (iii)).

Primary products from oil. 

Primary products from oil are oil and 

all products derived from the 

destructive distillation of oil, including 

volatile products, light oils such as 

motor fuel and kerosene, distillates 

such as naphtha, lubricating oils, 

greases, and waxes, and residues 

such as fuel oil.

Primary products from gas. 

Primary products from gas are all gas 

and associated hydrocarbon 

components from gas or oil wells, 

whether recovered at the lease or 

upon further processing, including 

natural gas; condensates; liquefied 

petroleum gases such as ethane, 

propane, and butane; and liquid 

products such as natural gasoline.

See Temporary Regulations 

section 1.927(a)-1T(g)(2) for 

additional information.

S corporations and partnerships. 

S corporations and partnerships that 

meet specific requirements can 

choose to figure QPAI at the entity 

level and allocate QPAI to 

shareholders or partners. The 

shareholder or partner then combines 

the allocated portion with QPAI from 

other sources on Form 8903 to 

determine the DPAD. S corporations 

or partnerships that aren't eligible to 

figure QPAI at the entity level must 

report each shareholder's or partner's 

share of deductions, expenses, or 

losses on Schedule K-1 with other 

information the shareholder or partner 

needs to figure their DPAD.

QPAI from an estate or trust. An 

estate or trust will figure its QPAI and 

report each beneficiary's share on 

Schedule K-1 (Form 1041).

Cooperatives. Cooperatives figure 

QPAI without any deduction for 

patronage dividends, per-unit retain 

allocations, or nonpatronage 

distributions under section 1382(b) or 

(c).

Domestic Production Gross 

Receipts (DPGR)

Using any reasonable method that is 

satisfactory to the Secretary based on 

the facts and circumstances, you 

must determine whether gross 

receipts qualify as DPGR on an 

item-by-item basis (and not, for 

example, on a division-by-division, 

product line-by-product line, or 

transaction-by-transaction basis); 

however, see Regulations section 

1.199-3(d)(2) for special rules and 

Regulations section 1.199-(3)(d)(3) 

for an exception. See Regulations 

section 1.199-(3)(d)(4) for examples.

DPGR activities. Generally, your 

gross receipts (defined later) derived 

Instructions for Form 8903 (Rev. 12-2019) -3-
from the following activities are 

DPGR.

1. Construction of real property 

you perform in the United States in 

your construction trade or business.

2. Engineering or architectural 

services you perform in the United 

States in your engineering or 

architectural services trade or 

business for the construction of real 

property in the United States.

3. Any lease, rental, license, sale, 

exchange, or other disposition of the 

following.

a. Qualifying production property 

you manufacture, produce, grow, or 

extract in whole or in significant part in 

the United States. See Qualifying 

Production Property and 

Manufacturing, producing, growing, or 

extracting, later, for details.

b. Any qualified film you produce.

c. Electricity, natural gas, or 

potable water you produce in the 

United States.

In general, gross receipts derived 

from the following activities aren't 

DPGR.

• Activities not attributable to the 

actual conduct of a trade or business.

• The sale of food and beverages you 

prepare at a retail establishment.

• The lease, rental, or license of 

property between certain persons 

treated as a single employer.

• The lease, rental, license, sale, 

exchange, or other disposition of land.

• The transmission or distribution of 

electricity, natural gas, or potable 

water.

• Advertising and product-placement; 

however, see Regulations section 

1.199-3(i)(5)(ii) for exceptions.

• Customer and technical support, 

telephone and other 

telecommunications services, online 

services (including Internet access 

services, online banking services, and 

providing access to online electronic 

books, newspapers, and journals), 

and other similar services; however, 

see Regulations section 1.199-3(i)(6)

(iii) for exceptions.

Activities in the United States. 

For purposes of determining DPGR, 

the United States includes the 50 

states, the District of Columbia, the 

territorial waters of the United States, 

and the seabed and subsoil of those 

submarine areas that are adjacent to 

the territorial waters of the United 

States and over which the United 

States has exclusive rights, in 

accordance with international law, 

with respect to the exploration and 

exploitation of natural resources. The 

United States does not include 

possessions and territories of the 

United States or the airspace or space 

over the United States and these 

areas.

Activities in Puerto Rico. For 

purposes of determining DPGR, the 

United States includes Puerto Rico for 

a taxpayer who has gross receipts 

from sources within Puerto Rico that 

are subject to tax under sections 1 or 

11, but only for the first 12 tax years of 

the taxpayer that begin after 2005 and 

before 2018.

Gross receipts. Your gross receipts 

are receipts that are recognized under 

your method of accounting for the tax 

year. Gross receipts include the 

following amounts from your trade or 

business activities.

• Total sales (net of returns and 

allowances).

• Amounts received for services, not 

including wages received as an 

employee.

• Income from investments and from 

incidental or outside sources 

(including sales of business property).

• Amounts received that are allocable 

to the payment of sales tax or other 

similar state and local taxes if the tax 

is legally imposed on you.

Gross receipts are generally not 

reduced by the:

• Cost of goods sold, or

• Adjusted basis of property (other 

than capital assets) sold or otherwise 

disposed of if such property is 

described in section 1221(a)(1) 

through (5).

Allocation of gross receipts. You 

generally must allocate your gross 

receipts between DPGR and 

non-DPGR. Allocate gross receipts 

using a reasonable method that 

accurately identifies gross receipts 

that are DPGR. However, if less than 

5% of your gross receipts are 

non-DPGR, you can treat all of your 

gross receipts as DPGR. Also, if less 

than 5% of your gross receipts are 

DPGR, you can treat all of your gross 

receipts as non-DPGR.

For details, see Regulations 

section 1.199-1(d).

EAG partnerships. A partnership is 

an EAG partnership if a single EAG 

owns all the interests in the capital 

and profits of the partnership at all 

times during the tax year. If the 

requirements are met, the EAG 

partnership and all members of the 

EAG are treated as a single taxpayer 

for purposes of determining the 

amount of domestic production gross 

receipts (DPGR).

Special rules apply to the 

attribution of gross receipts (a) to a 

member of the EAG from the 

disposition of property an EAG 

partnership engaged in MPGE, and 

(b) to an EAG partnership from the 

disposition of property another EAG 

partnership engaged in MPGE, both 

of which are members of the same 

EAG. See Regulations section 

1.199-3(i)(8) for more information, 

exceptions, and other rules.

Qualifying Production Property

The following are qualifying 

production property.

• Tangible personal property.

• Computer software.

• Sound recordings.

Tangible personal property. 

Tangible personal property includes 

any tangible property other than land, 

buildings (including structural 

components), computer software, 

sound recordings, qualified films, 

electricity, natural gas, or potable 

water. Tangible personal property 

also includes any gas (other than 

natural gas), chemical, and similar 

property, such as steam, oxygen, 

hydrogen, or nitrogen.

Machinery, printing presses, 

transportation and office equipment, 

refrigerators, grocery counters, testing 

equipment, display racks and shelves, 

and neon and other signs that are 

contained in or attached to a building 

constitute tangible personal property.

Note. Local law doesn't control 

whether property is tangible personal 

property.

See Regulations section 1.199-3(j)

(2) for more information.

Computer software. In general, 

computer software includes the 

following.

• Any program, routine, or sequence 

of machine-readable code that is 

designed to cause a computer to 

-4- Instructions for Form 8903 (Rev. 12-2019)
perform a desired function or set of 

functions, and the documentation 

required to describe or maintain that 

program or routine. An electronic 

book online or for download doesn't 

constitute computer software.

• Machine-readable code for (a) 

video games or similar programs, (b) 

equipment that is an integral part of 

other property, and (c) typewriters, 

calculators, adding and accounting 

machines, copiers, duplicating 

equipment, and similar equipment, 

even if the program isn't designed to 

operate on a computer as defined in 

section 168(i)(2)(B).

• Computer programs of all classes, 

including operating systems, 

executive systems, monitors, 

compilers and translators, assembly 

routines, utility programs, and 

application programs.

• Any incidental and ancillary rights 

that are necessary for the acquisition 

of the title to, the ownership of, or the 

right to use computer software, and 

that are used only in connection with 

that specific software. These 

incidental and ancillary rights aren't 

included in the definition of a 

trademark or trade name under 

Regulations section 1.197-2(b)(10)(i).

Exception. Computer software 

doesn't include any data or 

information base unless the data or 

information base is in the public 

domain and is incidental to a 

computer program.

Example. If a word processing 

program includes a dictionary feature 

that may be used to spell-check a 

document, then the entire program 

(including the dictionary feature) is a 

computer software program 

regardless of the form in which the 

dictionary feature is maintained or 

stored.

See Regulations section 1.199-3(j)

(3) for more information.

Sound recordings. Sound 

recordings include any works that 

result from the fixation of a series of 

musical, spoken, or other sounds. The 

definition of sound recordings is 

limited to the master copy of the 

recordings (or other copy from which 

the holder is licensed to make and 

produce copies), and if the medium 

(such as compact discs, tapes, or 

other phonorecordings) in which the 

sounds may be embodied is tangible, 

then the medium is considered 

tangible personal property.

Exception. Sound recordings 

don't include the creation of 

copyrighted material in a form other 

than a sound recording, such as lyrics 

or music composition.

See Regulations section 1.199-3(j)

(4) for more information.

Manufacturing, producing, growing, or extracting (MPGE). MPGE 

generally include the following trade 

or business activities.

• Activities related to manufacturing, 

producing, growing, extracting, 

installing, developing, improving, and 

creating qualifying production 

property.

• Making qualifying production 

property (QPP) out of scrap, salvage, 

or junk material, or from new or raw 

material by processing, manipulating, 

refining, or changing the form of an 

article, or by combining or assembling 

two or more articles.

• Cultivating soil, raising livestock, 

fishing, and mining minerals.

• Storage, handling, or other 

processing activities (other than 

transportation activities) in the United 

States related to the sale, exchange, 

or other disposition of agricultural 

products, provided the products are 

consumed in connection with, or 

incorporated into, manufacturing, 

producing, growing, or extracting 

QPP, whether or not by the taxpayer.

Generally, the packaging, 

repackaging, labeling, or minor 

assembly of QPP does not qualify as 

an MPGE activity unless you engage 

in another MPGE activity with respect 

to that QPP. Furthermore, the 

installation of qualifying production 

property does not qualify as an MPGE 

activity unless you MPGE the 

qualifying production property being 

installed and you have the benefits 

and burdens of ownership of the QPP 

under federal income tax principles 

during the installation period.

For details, see Regulations 

section 1.199-3(e). Your MPGE of 

QPP must be in whole or in significant 

part within the United States. See 

Regulations section 1.199-3(f) and 

(g).

Qualifying in-kind partnerships. 

In general, partners of qualifying 

in-kind partnerships are treated as 

manufacturing, producing, growing, or 

extracting the property they receive as 

a distribution from the partnership. For 

purposes of section 199, a qualifying 

in-kind partnership is a partnership 

engaged in any of the following 

activities.

• The extraction, refining, or 

processing of oil, natural gas (as 

described in Regulations section 

1.199-3(l)(2)), petrochemicals, or 

products derived from oil, natural gas, 

or petrochemicals, in whole or 

significant part within the United 

States.

• The production or generation of 

electricity in the United States.

• The extraction and processing of 

minerals (as defined in Regulations 

section 1.611-1(d)(5)) within the 

United States.

• Any other industry or activity 

designated as an industry or activity of 

a qualifying in-kind partnership by 

publication in the Internal Revenue 

Bulletin.

For more information on qualifying 

in-kind partnerships, see Regulations 

sections 1.199-3(i)(7). For qualifying 

in-kind partnerships engaged solely in 

the extraction and processing of 

minerals, see Rev. Rul. 2007-30 on 

page 1277 of I.R.B. 2007-21 at 

IRS.gov/pub/irs-irbs/irb07-21.pdf.

Qualified Film

A qualified film is any motion picture 

film, video tape, or live or delayed 

television programming for which 50% 

or more of the total compensation 

required to produce the film is paid for 

services performed by actors, 

production personnel, directors, and 

producers in the United States.

A qualified film includes the 

copyrights, trademarks, or other 

intangibles related to the film. Also, a 

DPAD can be taken for the production 

of a qualified film regardless of the 

methods and means by which the film 

is distributed.

See section 199(c)(6) and 

Regulations section 1.199-3(k) for 

more information. For special rules 

related to S corporations, 

partnerships, S corporation 

shareholders, and partners 

participating in the production of films, 

see Film production under S 

corporations and partnerships, earlier.

Instructions for Form 8903 (Rev. 12-2019) -5-
Cost of Goods Sold

When figuring QPAI, cost of goods 

sold includes the:

• Cost of goods sold to customers, 

and

• Adjusted basis of non-inventory 

property you sold or otherwise 

disposed of in your trade or business.

Allocation of cost of goods sold. 

Generally, you must allocate your cost 

of goods sold between DPGR and 

non-DPGR using a reasonable 

method. If you use a method to 

allocate gross receipts between 

DPGR and non-DPGR, the use of a 

different method to allocate cost of 

goods sold won't be considered 

reasonable, unless it is more 

accurate. However, if you qualify to 

use the small business simplified 

overall method, you can use it to 

apportion both cost of goods sold and 

other deductions, expenses, and 

losses between DPGR and 

non-DPGR. For more information 

about this allocation method, see 

Small Business Simplified Overall 

Method, later.

For details about allocating cost of 

goods sold, see Regulations section 

1.199-4.

Other Deductions, Expenses, or 

Losses

When figuring QPAI, other 

deductions, expenses, or losses 

include all deductions, expenses, or 

losses from a trade or business other 

than cost of goods sold and employee 

business expenses.

Allocation and apportionment of 

other deductions, expenses, or 

losses. You must generally use one 

of the following three methods to 

allocate and apportion other trade or 

business deductions, expenses, or 

losses between DPGR and 

non-DPGR.

• Small business simplified overall 

method. (You must qualify to use this 

method.)

• Simplified deduction method. (You 

must qualify to use this method.)

• Section 861 method.

However, don't allocate and 

apportion a net operating loss 

deduction or deductions not 

attributable to the conduct of a trade 

or business to DPGR under any of the 

methods.

S corporations and 

partnerships. S corporations and 

partnerships that meet specific 

requirements can choose to figure 

QPAI at the entity level and allocate 

the QPAI to shareholders or partners. 

S corporations or partnerships that 

aren't eligible to figure QPAI under 

those rules must report each 

shareholder's or partner's share of its 

deductions, expenses, or losses on 

Schedule K-1 with other information 

the shareholder or partner needs to 

figure their DPAD.

Estates and trusts. An estate or 

trust allocates directly attributable 

trade or business deductions, 

expenses, or losses between DPGR 

and non-DPGR under Regulations 

section 1.652(b)-3. An estate or trust 

that is eligible must use the simplified 

deduction method to allocate 

indirectly attributable trade or 

business deductions, expenses, or 

losses between DPGR and 

non-DPGR. Otherwise, the estate or 

trust uses the section 861 method to 

allocate these indirect items.

Small Business Simplified Overall 

Method

You generally can use the small 

business simplified overall method to 

apportion cost of goods sold and 

other deductions, expenses, and 

losses between DPGR and 

non-DPGR if you meet any of the 

following tests.

• You are engaged in the trade or 

business of farming and aren't 

required to use the accrual method of 

accounting (see section 447).

• Your average annual gross receipts 

(defined below) are $5 million or less.

• You are eligible to use the cash 

method of accounting under Rev. 

Proc. 2002-28. You can find Rev. 

Proc. 2002-28 on page 815 of I.R.B. 

2002-18 at IRS.gov/pub/irs-irbs/

irb02-18.pdf.

Under the small business simplified 

overall method, your total cost of 

goods sold and other deductions, 

expenses, and losses are ratably 

apportioned between DPGR and 

non-DPGR based on relative gross 

receipts.

Example. Your total cost of goods 

sold and other trade or business 

deductions, expenses, or losses are 

$400 and don't include a net operating 

loss deduction. You have $1,000 total 

gross receipts and $750 DPGR. Your 

DPGR equal 75% of your total gross 

receipts. Under the small business 

simplified overall method, you 

subtract $300 ($400 × 0.75) of your 

total cost of goods sold and other 

trade or business deductions, 

expenses, or losses from your DPGR 

to figure your QPAI, which is $450 

($750 - $300).

Average annual gross receipts. 

For this purpose, your average annual 

gross receipts are your average 

annual gross receipts for the 

preceding 3 tax years. If your 

business hasn't been in existence for 

3 tax years, base your average on the 

period it has existed. Include any 

short tax years by annualizing the 

short tax year's gross receipts by (a) 

multiplying the gross receipts for the 

short period by 12, and (b) dividing 

the result by the number of months in 

the short period.

Estates and trusts. Estates and 

trusts can't use the small business 

simplified overall method.

S corporations and partnerships. 

An S corporation or partnership (other 

than a qualifying in-kind partnership or 

expanded affiliated group partnership) 

can choose to use the small business 

simplified overall method to figure 

QPAI at the entity level and allocate 

that QPAI to shareholders or partners 

if it meets the requirements of an 

eligible small pass-through entity. A 

shareholder or partner who is 

allocated QPAI from an eligible small 

pass-through entity must report that 

QPAI on line 7.

For a definition of a qualifying 

in-kind partnership, see Regulations 

section 1.199-3(i)(7). For a definition 

of an expanded affiliated group 

partnership, see Regulations section 

1.199-3(i)(8).

An S corporation or partnership is 

an eligible small pass-through entity if 

it meets each of the following 

requirements for the current tax year.

• It satisfies one of the following 

requirements: (a) it has average 

annual gross receipts for the 3 tax 

years preceding the current tax year 

of $5 million or less, (b) it is engaged 

in the trade or business of farming and 

isn't required to use the accrual 

method of accounting, or (c) it is 

eligible to use the cash method of 

-6- Instructions for Form 8903 (Rev. 12-2019)
accounting under Rev. Proc. 2002-28 

(that is, it has average annual gross 

receipts of $10 million or less and isn't 

excluded from using the cash method 

under section 448 of the Internal 

Revenue Code).

• It has total cost of goods sold and 

deductions (excluding the net 

operating loss deduction) added 

together of $5 million or less.

• It has DPGR.

• If a partnership, it doesn't have a 

partner that is an ineligible partnership 

(qualifying in-kind partnerships or 

expanded affiliated group 

partnerships).

Expanded affiliated groups. For 

additional rules that apply to 

expanded affiliated groups, see 

Regulations section 1.199-4(f)(4).

Oil-related production activities. If 

you have oil-related QPAI, and you 

choose to use the small business 

simplified overall method, you must 

allocate part of these costs to DPGR 

from oil-related production activities to 

determine oil-related QPAI. See 

Line 4, later.

For details about the small 

business simplified overall method, 

see Regulations section 1.199-4(f).

Simplified Deduction Method

You generally can use the simplified 

deduction method to apportion other 

deductions, expenses, and losses 

(but not cost of goods sold) between 

DPGR and non-DPGR if you meet 

either of the following tests.

• Your total trade or business assets 

at the end of your tax year are $10 

million or less.

• Your average annual gross receipts 

(defined above) are $100 million or 

less.

Under the simplified deduction 

method, your other trade or business 

deductions, expenses, or losses are 

ratably apportioned between DPGR 

and non-DPGR based on relative 

gross receipts.

Example. Your total other trade or 

business deductions, expenses, or 

losses are $400 and don't include a 

net operating loss. You have $240 of 

cost of goods sold allocable to DPGR. 

You have $1,000 total gross receipts 

and $600 DPGR. Your DPGR equal 

60% of your total gross receipts. 

Under the simplified deduction 

method, you subtract $240 ($400 × 

0.60) of your total other trade or 

business deductions, expenses, or 

losses from your DPGR to figure your 

QPAI, which is $120 ($600 - $240 -

$240).

S corporations and partnerships. 

An S corporation or partnership (other 

than a qualifying in-kind partnership or 

expanded affiliated group partnership) 

can choose to use the simplified 

deduction method to figure QPAI at 

the entity level and allocate that QPAI 

to shareholders or partners if it meets 

the requirements of an eligible widely 

held pass-through entity. A 

shareholder or partner who is 

allocated QPAI from an eligible widely 

held pass-through entity must report 

that QPAI on line 7.

For a definition of a qualifying 

in-kind partnership, see Regulations 

section 1.199-3(i)(7). For a definition 

of an expanded affiliated group 

partnership, see Regulations section 

1.199-3(i)(8).

An S corporation or partnership is 

an eligible widely held pass-through 

entity if it meets each of the following 

requirements for its current tax year.

• Either of the two tests discussed 

earlier under Simplified Deduction 

Method.

• It has total cost of goods sold and 

deductions added together of $100 

million or less.

• It has DPGR.

• On every day during the current tax 

year, all of its shareholders or partners 

are individuals, estates, or trusts 

described (or treated as described) in 

section 1361(c)(2).

• On every day during the current tax 

year, no shareholder or partner owns, 

alone or combined with the ownership 

interests of all related persons, more 

than 10% of (a) total shares of the S 

corporation or (b) the profits or capital 

interests in the partnership.

Estates and trusts. If eligible by 

meeting one of the two tests 

described earlier, an estate or trust 

must use the simplified deduction 

method to allocate its indirectly 

attributable trade or business 

deductions, expenses, or losses 

between DPGR and non-DPGR. All 

estates and trusts must allocate 

directly attributable deductions, 

expenses, or losses between DPGR 

and non-DPGR under Regulations 

section 1.652(b)-3.

Expanded affiliated groups. For 

additional rules that apply to 

expanded affiliated groups, see 

Regulations section 1.199-4(e)(4).

Oil-related production activities. If 

you have oil-related QPAI, and you 

choose to use the simplified 

deduction method, you must allocate 

part of these costs to DPGR from 

oil-related production activities to 

determine oil-related QPAI. See 

Line 3, later.

Section 861 Method

You don't have to meet any tests to 

use the section 861 method. Under 

the section 861 method, you generally 

must apply the rules of the section 

861 regulations to allocate and 

apportion other trade or business 

deductions, expenses, or losses 

between DPGR and non-DPGR. 

Section 199 is treated as an 

“operative section” described in 

Regulations section 1.861-8(f).

For details, see Regulations 

section 1.199-4(d).

For guidance on automatic 

approval to change certain elections 

relating to the apportionment of 

interest expense and research and 

experimentation expenditures, see 

Rev. Proc. 2006-42. You can find 

Rev. Proc. 2006-42 on page 931 of 

I.R.B. 2006-47 at IRS.gov/pub/irs-irbs/

irb06-47.pdf.

S corporations. An S corporation 

can't use the section 861 method to 

figure QPAI. Unless it is eligible to use 

the small business simplified overall 

method or simplified deduction 

method, an S corporation must report 

each shareholder's share of its 

deductions, expenses, or losses on 

Schedule K-1 (Form 1120S) that the 

shareholder needs to figure their 

DPAD.

Partnerships. A partnership (other 

than a qualifying in-kind partnership or 

expanded affiliated group partnership) 

can choose to use the 861 method to 

figure QPAI at the entity level and 

allocate that QPAI to qualifying 

partners (defined later) if it meets the 

requirements of an eligible 861 

partnership. A partner who is 

allocated QPAI from an eligible 861 

partnership must report that QPAI on 

line 7.

Instructions for Form 8903 (Rev. 12-2019) -7-
For a definition of a qualifying 

in-kind partnership, see Regulations 

section 1.199-3(i)(7). For a definition 

of an expanded affiliated group 

partnership, see Regulations section 

1.199-3(i)(8).

An eligible 861 partnership must 

meet the following requirements for its 

current tax year.

• It has at least 100 partners on any 

day during the partnership's tax year.

• At least 70% of the partnership is 

owned, at all times during its tax year, 

by qualifying partners (defined next).

• It has DPGR.

Qualifying partner. A qualifying 

partner is a partner that, on each day 

during the partnership's tax year that 

the partner owns an interest in the 

partnership:

• Is not a general partner or a 

managing member of a partnership 

organized as a limited liability 

company,

• Doesn't materially participate 

(discussed later) in the activities of the 

partnership,

• Doesn't hold, alone or combined 

with the interests of all related 

persons (defined next), 5% or more of 

the profits or capital interests in the 

partnership,

• Is not an ineligible entity (qualifying 

in-kind partnership or expanded 

affiliated group partnership).

Related persons. For purposes of 

determining whether a partner is a 

qualifying partner, persons are related 

if they meet the requirements of 

sections 267(b) or 707(b), 

disregarding sections 267(e)(1) and 

(f)(1)(A).

Material participation. A 

qualifying partner can't materially 

participate in the activities of the 

partnership. See section 5.05 of Rev. 

Proc. 2007-34 for the definition of 

material participation.

Non-qualifying partners. An 

eligible 861 partnership can't allocate 

QPAI to non-qualifying partners (see 

Qualifying partner, earlier). Instead, 

the partnership must report each 

non-qualifying partner's share of 

deductions, expenses, or losses on 

Schedule K-1 that the partner needs 

to figure their DPAD. The partnership 

items allocated to non-qualifying 

partners must be excluded for 

purposes of figuring QPAI at the 

partnership level.

Estates and trusts. An estate or 

trust that can't use the simplified 

deduction method must use the 

section 861 method to allocate and 

apportion its indirectly attributable 

trade or business deductions, 

expenses, or losses between DPGR 

and non-DPGR. All estates and trusts 

must allocate directly attributable 

deductions, expenses, or losses 

between DPGR and non-DPGR under 

Regulations section 1.652(b)-3.

Oil-related production activities. If 

you have oil-related QPAI, apply the 

rules of section 861 to determine the 

amount of other trade or business 

deductions, expenses, or losses to 

deduct for purposes of determining 

oil-related QPAI.

Adjusted Gross or Taxable 

Income

Your allowable DPAD generally can't 

be more than 9% of your adjusted 

gross income if you are an individual, 

estate, or trust (taxable income for all 

other taxpayers) figured without the 

DPAD. If you don't have adjusted 

gross or taxable income, you 

generally aren't allowed a DPAD.

Note. Although patrons without 

adjusted gross or taxable income can 

claim a DPAD, the DPAD can't create 

or increase a net operating loss under 

section 172(d). However, you don't 

need taxable income to claim a DPAD 

you are allocated as a member of an 

Expanded Affiliated Group (EAG), and 

the DPAD can create or increase a 

net operating loss under Regulations 

section 1.199-7(c)(2).

Agricultural and horticultural cooperatives. For this purpose, figure 

taxable income without taking into 

account any allowable deduction for 

patronage dividends, per-unit retain 

allocations, or nonpatronage 

distributions.

Estates and trusts. See Line 11, 

later, to figure adjusted gross income.

Unrelated business taxable income (UBTI). The allowable DPAD 

of an organization taxed on its UBTI 

under section 511 generally can't be 

more than 9% of its UBTI figured 

without the DPAD.

Form W-2 Wages

Your allowable DPAD generally can't 

be more than 50% of the Form W-2 

wages you paid to your employees 

that are properly allocable to DPGR 

(including Form W-2 wages allocated 

to you on a Schedule K-1). If you 

didn't pay Form W-2 wages, you 

generally aren't allowed a DPAD. 

However, you don't need Form W-2 

wages to claim a DPAD you are 

allocated as a:

• Patron of an agricultural or 

horticultural cooperative, or

• Member of an expanded affiliated 

group.

Note. When figuring your DPAD, the 

limit equal to 50% of Form W-2 wages 

is based only on Form W-2 wages 

properly allocable to DPGR.

Form W-2 wages from an S corporation or partnership. S 

corporations and partnerships that 

meet specific requirements can 

choose to figure Form W-2 wages at 

the entity level and report the 

allocated portion of Form W-2 wages 

on Schedule K-1 to the S corporation 

shareholder or partner who then 

combines the allocated portion with 

Form W-2 wages from other sources 

on Form 8903 to determine the 

DPAD.

If the S corporation or partnership 

meets the requirements to be 

classified as one of the eligible entities 

listed below, it can figure Form W-2 

wages at the entity level and allocate 

Form W-2 wages to S corporation 

shareholders or partners.

• Eligible small pass-through entity. 

See S corporations and partnerships, 

under Small Business Simplified 

Overall Method, earlier, for the 

requirements.

• Eligible widely held pass-through 

entity. See S corporations and 

partnerships, under Simplified 

Deduction Method, earlier, for the 

requirements.

• Eligible 861 partnership. See 

Partnerships, under Section 861 

Method, earlier, for the requirements.

Form W-2 wages from an estate or 

trust. An estate or trust generally will 

figure its Form W-2 wages and 

apportion them between the 

beneficiary and the fiduciary (and 

among the beneficiaries) and report 

each beneficiary's share on 

Schedule K-1 (Form 1041).

Form W-2 wages for services performed in Puerto Rico. Taxpayers 

that determine DPGR under section 

-8- Instructions for Form 8903 (Rev. 12-2019)
199(d)(8)(A), figure Form W-2 wages 

by including wages paid for services 

performed in Puerto Rico without 

regard to section 3401(a)(8), but only 

during the first 12 tax years of the 

taxpayer that begin after 2005 and 

before 2018.

Form W-2 wages paid to produce a 

qualified film. Form W-2 wages 

include compensation for services 

performed in the United States by 

actors, production personnel, 

directors, and producers to produce a 

qualified film. See Qualified Film, 

earlier, for more information.

Figuring Form W-2 Wages Used 

To Figure the 50% Limit

You figure Form W-2 wages used to 

figure the 50% limit in two steps. First, 

you must determine the amount of 

wages to classify as Form W-2 wages 

under Regulations section 1.199-2(e)

(1). Second, you must figure Form 

W-2 wages that are properly allocable 

to DPGR.

Step 1. Figuring Form W-2 Wages

You can use one of the following three 

methods to figure your Form W-2 

wages.

• Unmodified box method.

• Modified box 1 method.

• Tracking wages method.

After you figure Form W-2 wages, 

see Step 2, later, to determine the 

Form W-2 wages to report on line 16 

of Form 8903.

Relevant Forms W-2. To figure your 

Form W-2 wages, generally use the 

sum of the amounts you properly 

report for each employee on Form 

W-2, Wage and Tax Statement, for 

the calendar year ending with or 

within your tax year. However, don't 

use any amounts reported on a Form 

W-2 filed with the Social Security 

Administration more than 60 days 

after its due date (including 

extensions).

Short tax year. If you have a short 

tax year, you generally will use the 

sum of the amounts you properly 

report for each employee on Form 

W-2 for the calendar year ending with 

or within that short tax year. However, 

if you have a short tax year that 

doesn't include a calendar year 

ending within that short tax year, then 

wages you properly report on Form 

W-2 which you paid during the short 

tax year are treated as W-2 wages for 

that short tax year.

Acquisition or disposition of a 

trade or business. If you acquired or 

disposed of a trade or business that 

causes you and another employer to 

pay W-2 wages to employees of the 

acquired or disposed of trade or 

business during the calendar year, 

then the W-2 wages for the calendar 

year of the acquisition or disposition 

are allocated between each employer 

based on the period that the 

employees of the acquired or 

disposed of trade or business were 

employed by each employer. If you 

have a short tax year that doesn’t 

include a calendar year ending within 

your short tax year, see Short tax 

year, earlier.

Non-duplication rule. Amounts that 

are treated as Form W-2 wages for a 

tax year under any method can't be 

treated as Form W-2 wages for any 

other tax year. Also, an amount can't 

be treated as Form W-2 wages by 

more than one taxpayer.

Unmodified box method. Under the 

unmodified box method, Form W-2 

wages are the smaller of:

1. The sum of the amounts 

reported in box 1 of the relevant 

Forms W-2, or

2. The sum of the amounts 

reported in box 5 of the relevant 

Forms W-2.

Modified box 1 method. Under the 

modified box 1 method, Form W-2 

wages are figured as follows.

1. Add the amounts reported in 

box 1 of the relevant Forms W-2.

2. Add all the amounts described 

below and included in box 1 of the 

relevant Forms W-2.

a. Amounts not considered wages 

for federal income tax withholding 

purposes.

b. Supplemental unemployment 

compensation benefits.

c. Sick pay or annuity payments 

from which the recipient requested 

federal income tax withholding.

3. Subtract (2) from (1).

4. Add together any amounts 

reported in box 12 of the relevant 

Forms W-2 that are properly coded D, 

E, F, G, or S.

5. Add (3) and (4).

Tracking wages method. Under the 

tracking wages method, Form W-2 

wages are figured as follows.

1. Add the amounts reported in 

box 1 of the relevant Forms W-2 that 

are also wages for federal income tax 

withholding purposes.

2. Add any amounts reported in 

box 1 of the relevant Forms W-2 that 

are both:

a. Wages for federal income tax 

withholding purposes, and

b. Supplemental unemployment 

compensation benefits.

3. Subtract (2) from (1).

4. Add together any amounts 

reported in box 12 of the relevant 

Forms W-2 that are properly coded D, 

E, F, G, or S.

5. Add (3) and (4).

Step 2. Form W-2 Wages

Allocable to DPGR

After you calculate Form W-2 wages, 

as discussed in Step 1, you must 

figure Form W-2 wages that are 

properly allocable to DPGR. You 

report the Form W-2 wages that are 

properly allocable to DPGR on line 16 

of Form 8903.

You can figure Form W-2 wages 

that are properly allocable to DPGR 

under one of the following methods.

• Small business simplified overall 

method safe harbor.

• Wage expense safe harbor.

• Any other reasonable method 

based on all the facts and 

circumstances.

Small business simplified overall 

method safe harbor. If you use the 

small business simplified overall 

method to allocate costs between 

DPGR and non-DPGR (see Small 

Business Simplified Overall Method, 

earlier), you can use the small 

business simplified overall method 

safe harbor to determine the amount 

of Form W-2 wages allocable to 

DPGR. Under this safe harbor 

method, the amount of Form W-2 

wages that is properly allocable to 

DPGR equals the proportion of DPGR 

to total gross receipts.

Wage expense safe harbor. If you 

are using either the section 861 

method of cost allocation under 

Regulations section 1.199-4(d) or the 

simplified deduction method under 

Instructions for Form 8903 (Rev. 12-2019) -9-
Regulations section 1.199-4(e), you 

determine the amount of wages 

properly allocable to DPGR by 

multiplying the amount of wages for 

the tax year by the ratio of your wage 

expense included in calculating QPAI 

for the tax year to your total wage 

expense used in calculating your 

taxable income (or adjusted gross 

income) for the tax year without 

regard to any wage expenses 

disallowed by sections 465, 469, 

704(d), or 1366(d).

If you use the section 861 method 

or the simplified deduction method, 

you must use the same expense 

allocation and apportionment 

methods that you use to determine 

QPAI to allocate and apportion wage 

expense for purposes of the safe 

harbor.

Wage expense included in cost 

of goods sold. When figuring the 

ratio of your wage expense included 

in calculating QPAI for the tax year to 

your total wage expense used in 

calculating your adjusted gross 

income or taxable income (as the 

case may be) for the tax year, 

determine the wage expense included 

in cost of goods sold using any 

reasonable method based on all of the 

facts and circumstances. For 

example, it may be reasonable to use 

(a) the amount of direct labor included 

in cost of goods sold or (b) section 

263A labor costs (as defined in 

Regulations section 1.263A-1(h)(4)

(ii)) included in cost of goods sold.

More information. For more 

information on figuring your Form W-2 

wages, see Regulations section 

1.199-2 and Rev. Proc. 2006-47. You 

can find Rev. Proc. 2006-47 on 

page 869 of I.R.B. 2006-45 at 

IRS.gov/pub/irs-irbs/irb06-45.pdf.

For more information on figuring 

Form W-2 wages properly allocable to 

DPGR, see Regulations section 

1.199-2(e)(2).

Specific Instructions

Complete lines 1 through 10, 

column (a), only if you have 

oil-related production 

activities. All others, do not complete 

lines 1 through 9, column (a), and 

enter zero on line 10a.

Enter amounts for all activities 

(including oil-related production 

CAUTION

!

activities) on lines 1 through 10, 

column (b).

Line 1

Domestic Production 

Gross Receipts (DPGR)

Enter your DPGR (defined earlier in 

the General Instructions under 

Domestic Production Gross 

Receipts).

Line 2

Allocable Cost of Goods 

Sold

Enter your cost of goods sold 

allocable to DPGR on line 2 unless 

you are using the small business 

simplified overall method. If you are 

using the small business simplified 

overall method, skip line 2, and go to 

Line 4.

For more information about 

allocating costs of goods sold, see 

Cost of Goods Sold, earlier, in the 

General Instructions. See Small 

Business Simplified Overall Method, 

earlier in the General Instructions, for 

more information about using this 

method to allocate cost of goods sold 

and other deductions or losses to 

DPGR.

Line 3

Allocable Deductions and 

Losses

Enter your other deductions or losses 

properly allocable to DPGR on line 3 

unless you are using the small 

business simplified overall method. If 

you are using the small business 

simplified overall method, skip line 3, 

and go to Line 4.

If you are using the simplified 

deduction method, enter on line 3 the 

other deductions or losses you ratably 

apportion to DPGR. See Simplified 

Deduction Method, earlier in the 

General Instructions, for more 

information about this method.

If you are using the section 861 

method, enter on line 3 the other 

deductions or losses you allocate or 

apportion to DPGR. See Section 861 

Method, earlier in the General 

Instructions, for more information 

about this method.

Oil-related production activities. If 

you use the simplified deduction 

method to calculate the other 

deductions or losses reported on 

line 3, column (b), you must make an 

additional calculation to determine the 

amount to report on line 3, column (a). 

Multiply the amount reported on line 3, 

column (b), by the ratio of oil-related 

DPGR reported on line 1, column (a), 

divided by DPGR from all activities 

reported on line 1, column (b). Enter 

the result on line 3, column (a). Don't 

reduce the amount reported on line 3, 

column (b), by this amount.

If you use the section 861 method, 

apply the rules of section 861 to 

determine the amount to report on 

line 3, column (a).

Line 4

Small Business Simplified 

Overall Method

Enter the amount of cost of goods 

sold and other deductions or losses 

you ratably apportion to DPGR using 

the small business simplified overall 

method.

Oil-related production activities. If 

you use the small business simplified 

overall method to calculate the cost of 

goods sold and other deductions, 

expenses, and losses reported on 

line 4, column (b), you must make an 

additional calculation to determine the 

amount to report on line 4, column (a). 

Multiply the amount reported on line 4, 

column (b), by the ratio of oil-related 

DPGR reported on line 1, column (a), 

divided by DPGR from all activities 

reported on line 1, column (b). Enter 

the amount on line 4, column (a). 

Don't reduce the amount reported on 

line 4, column (b), by this amount.

Line 7

Beneficiaries of estates and trusts, 

partners, and S corporation 

shareholders report the QPAI 

distributed from estates or trusts, and 

certain partnerships or S corporations 

on line 7. The QPAI should be 

reported to you on Schedule K-1 for 

Forms 1041, 1065, or 1120S. See the 

related Schedule K-1 and its 

instructions for more information.

Line 9

Estates and trusts must use 

Regulations section 1.652(b)-3 to 

allocate QPAI to beneficiaries if DNI is 

distributed or required to be 

distributed to beneficiaries. Report the 

amount of QPAI allocated to 

beneficiaries on line 9. See Estates 

-10- Instructions for Form 8903 (Rev. 12-2019)
and trusts, earlier under Definitions 

and Special Rules.

Line 10a Oil-Related 

Qualified Production 

Activities Income

Add lines 1 through 9, column (a), to 

determine oil-related QPAI. If you 

don't have oil-related QPAI, don't 

complete lines 1 through 9, column 

(a), and enter zero on line 10a.

Line 11

Income Limitation

Individuals. Enter your adjusted 

gross income from line 7 of Form 

1040 figured without the DPAD.

Olympic and Paralympic medals 

and USOC prize money. For 

purposes of figuring your DPAD, your 

adjusted gross income doesn't 

include the value of any medal 

awarded in, or any prize money 

received from the United States 

Olympic Committee on account of 

competition in the Olympic Games or 

Paralympic Games. If line 7 of your 

Form 1040 includes these amounts, 

then reduce your adjusted gross 

income by them before entering it on 

line 11.

Corporations. Enter your taxable 

income from the applicable line of 

your tax return (for example, line 30 of 

Form 1120) figured without the DPAD.

Members of EAGs. See Line 24, 

later.

Agricultural and horticultural cooperatives. Enter your taxable 

income figured without the DPAD or 

the deductions for patronage 

dividends, per-unit retain allocations, 

and nonpatronage distributions under 

section 1382(b) or (c).

Estates and trusts. Enter your 

adjusted gross income figured without 

the DPAD. See the Instructions for 

Form 1041 to figure adjusted gross 

income. Use the method discussed 

under How to figure AGI for estates 

and trusts, under Line 15a–Other 

Deductions.

Unrelated business taxable income (UBTI). An organization taxed 

on its UBTI under section 511 enters 

its UBTI from line 38 of Form 990-T 

figured without the DPAD.

Note. If you have extraterritorial 

income (ETI), figure taxable income 

without regard to any claimed ETI 

exclusions.

See Regulations section 1.199-1(b)

(1) for more information.

Line 14a

If you have oil-related qualified 

production income, use line 14a to 

determine the least of the following 

amounts.

• Oil-related QPAI—line 10a,

• QPAI—line 10b, or

• Adjusted gross income for an 

individual, estate, or trust (taxable 

income for all other 

taxpayers)—line 11.

All others, enter zero on line 14a.

Line 14b Reduction for 

Oil-Related Qualified 

Production Activities 

Income

If you have oil-related qualified 

production income, use line 14b to 

reduce your DPAD by 3% of the 

amount reported on line 14a.

All others, enter zero on line 14b.

Line 16

Form W-2 Wages

Enter your Form W-2 wages that are 

properly allocable to DPGR 

(discussed earlier under Form W-2 

Wages). Don't include Form W-2 

wages you must report on line 17.

Line 17

Beneficiaries of estates and trusts, 

partners, and S corporation 

shareholders report the Form W-2 

wages distributed from estates or 

trusts, and certain partnerships or S 

corporations on line 17. The Form 

W-2 wages should be reported to you 

on the Schedule K-1 for Forms 1041, 

1065, or 1120S. See the related 

Schedule K-1 and its instructions for 

more information.

Line 19

Estates and trusts must use 

Regulations section 1.652(b)-3 to 

allocate Form W-2 wages to 

beneficiaries if DNI is distributed or 

required to be distributed to 

beneficiaries. Report the amount of 

the Form W-2 wages allocated to 

beneficiaries on line 19. See Estates 

and trusts, earlier under Definitions 

and Special Rules.

Line 24

Expanded Affiliated Group 

Allocation

These instructions explain how 

expanded affiliated groups (EAGs) 

(defined earlier under Definitions and 

Special Rules) figure and report the 

DPAD. Certain members of an EAG 

may not be required to complete the 

entire Form 8903. See How To 

Report, later.

Computation of the EAG's 

DPAD

In general, the DPAD for an EAG is 

determined by aggregating each 

member's taxable income or loss, 

QPAI, and Form W-2 wages. A 

member's QPAI may be positive or 

negative. Also, a member's taxable 

income or loss and QPAI are 

determined under the member's 

method of accounting.

Members with different tax years. 

If members of an EAG have different 

tax years, in determining the DPAD of 

a member, the reporting member 

must take into account the taxable 

income or loss, QPAI, and Form W-2 

wages of each group member that are 

both:

• Attributable to the period that the 

member of the EAG and the reporting 

member are both members of the 

EAG, and

• Taken into account in a tax year 

that ends with or within the tax year of 

the reporting member with respect to 

which the DPAD is figured.

For an example that explains the 

above requirements, see Regulations 

section 1.199-7.

Net operating losses. The net 

operating loss (NOL) of a member of 

an EAG that is used in the 

computation of the EAG's taxable 

income isn't treated as an NOL 

carryback or carryover to determine 

the taxable income limitation in a prior 

or subsequent year for purposes of 

section 199(a)(1)(B). See Regulations 

section 1.199-7(b)(4) for more 

information.

Allocation of the DPAD to 

Members of the EAG

The EAG's DPAD is allocated among 

members of the EAG based on the 

ratio of each member's QPAI to the 

Instructions for Form 8903 (Rev. 12-2019) -11-
total QPAI of the EAG. The allocation 

is made regardless of whether the 

EAG member has taxable income or 

loss or Form W-2 wages for the tax 

year. If a member has negative QPAI, 

that member's QPAI is treated as zero 

for purposes of the allocation.

Consolidated Groups

Under section 199, a consolidated 

group is treated as a single member of 

the EAG. If all members of an EAG 

are members of the same 

consolidated group, the DPAD of the 

consolidated group is determined 

based on the consolidated taxable 

income or loss, QPAI, and Form W-2 

wages of the group and not the 

separate taxable income or loss, 

QPAI, and Form W-2 wages of its 

members. The consolidated group will 

generally file only one Form 8903. For 

details, see Regulations section 

1.199-7.

If an EAG includes both 

consolidated and non-consolidated 

members, the consolidated (not 

separate) taxable income or loss, 

QPAI, and Form W-2 wages of the 

consolidated group are aggregated 

with the taxable income or loss, QPAI, 

and Form W-2 wages of the 

non-consolidated group members to 

determine the DPAD. For details, see 

Regulations section 1.199-7(d)(4).

A consolidated group's DPAD (or 

the DPAD allocated to a consolidated 

group that is a member of an EAG) is 

allocated to the members of the 

consolidated group in proportion to 

each member's QPAI, if any, 

regardless of whether the 

consolidated group member has:

• Separate taxable income or loss for 

the tax year, and

• Form W-2 wages for the tax year.

For purposes of allocating the 

DPAD of a consolidated group among 

its members, any redetermination of a 

corporation's receipts, cost of goods 

sold, or other deductions from an 

intercompany transaction described in 

Regulations section 1.1502-13(c)(1)(i) 

or (c)(4) isn't taken into account, and if 

a consolidated group member has 

negative QPAI, the member's QPAI is 

treated as zero.

Simplified deduction and small 

business simplified overall methods. For purposes of applying the 

simplified deduction method and the 

small business simplified overall 

method, a consolidated group 

determines its QPAI by reference to 

its members' DPGR, non-DPGR, cost 

of goods sold, and all other 

deductions, expenses, or losses, 

determined on a consolidated basis.

How To Report

All members of an EAG are treated as 

a single corporation for purposes of 

determining the DPAD. However, the 

DPAD is allocated to each member.

EAG reporting member. The EAG 

chooses a reporting member from 

amongst all members of the EAG with 

the same tax year to figure the DPAD 

for all EAG members (computing 

members). The reporting member 

completes lines 10a through 16 and 

lines 18 through 22 of the Form 8903 

for the group.

The reporting member also does 

the following.

1. Enters the portion of the 

deduction allocated to the other 

members of the EAG (including 

non-computing members) as a 

negative number on line 24.

2. Completes lines 23 and 25.

3. Attaches a schedule showing 

how the reporting member figured its 

own QPAI.

4. Attaches a schedule that shows 

how the DPAD was figured for the 

group and each member's name, EIN, 

and share of the DPAD.

5. Provides a copy of the group 

DPAD computation schedule to the 

other computing members of the 

group.

EAG computing member other 

than the reporting member. An 

EAG computing member other than 

the reporting member does the 

following.

1. Completes a separate Form 

8903, skips lines 1–22, and enters its 

share of the group deduction on 

line 24 as a positive number.

2. Completes lines 23 and 25.

3. Attaches a schedule showing 

how the computing member figured its 

own QPAI.

4. Attaches a copy of the group 

DPAD computation schedule 

provided by the reporting member.

Consolidated groups. If the EAG is 

comprised of a single consolidated 

group, the common parent of the 

consolidated group completes lines 1 

through 25 for the group. If the EAG is 

comprised of more than just the 

members of a single consolidated 

group, the common parent files a 

Form 8903 for the consolidated group 

as either the reporting member or as 

an EAG member other than the 

reporting member, whichever is 

appropriate. In all events, the common 

parent attaches a schedule that 

shows the amount of the consolidated 

group's DPAD allocated to each 

member of the consolidated group, 

and how the allocated amount was 

calculated.

Line 25

Domestic Production 

Activities Deduction

Combine lines 22 through 24 and 

enter the result on line 25. For Form 

1040 returns filed after tax year 2017, 

include the result from line 25 of Form 

8903 on Schedule 1 (Form 1040), 

line 36. For Form 1120 returns filed 

after tax year 2017, enter the result 

from line 25 of Form 8903 on line 26, 

Other deductions.

For tax years beginning after 

December 31, 2017, additional 

guidance under section 199A(g) is 

pending.

Agricultural and Horticultural 

Cooperatives

Reduce the amount the cooperative 

deducts under section 1382 by the 

portion of the cooperative's DPAD 

allocated to its patrons. However, the 

entire amount on line 25, which 

includes any amount allocated to 

patrons, is deductible under section 

199 by the cooperative. See 

Agricultural and horticultural 

cooperatives in the General 

Instructions for more information on 

this subject.

How to report. Cooperatives aren't 

permitted to net patronage losses with 

nonpatronage income. Therefore, 

they must figure taxable income from 

patronage or nonpatronage activities 

separately on Schedule G, Form 

1120-C.

Patronage income and 

deductions only. Cooperatives that 

have only patronage income and 

deductions generally complete Form 

8903 as described earlier in the 

instructions.

-12- Instructions for Form 8903 (Rev. 12-2019)
Patronage and nonpatronage 

income and deductions. For tax 

years beginning before January 1, 

2018, cooperatives with both 

patronage and nonpatronage income 

or deductions must follow the 

instructions below for completing 

Form 8903.

Report the total amount of the 

DPAD to be claimed on Form 1120-C 

on line 25 of Form 8903, and leave 

lines 1 through 24 blank. Attach to 

Form 8903 separate calculations of 

the DPAD from patronage and 

nonpatronage activities, which 

conform to lines 1 through 24 of Form 

8903.

Enter the DPAD from patronage 

and nonpatronage sources reported 

on the attachment on line 6a, column 

(a), Patronage, and line 6a, column 

(b), Nonpatronage, respectively, of 

Schedule G, Form 1120-C.

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