Instructions For Form 8903 - Domestic Production Activities Deduction

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operate on a computer as defined in

Making qualifying production

EAG are treated as a single taxpayer

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

property out of scrap, salvage, or junk

for purposes of section 199(c)(4).

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Computer programs including, but

material, or from new or raw material

Special rules apply to the

not limited to, operating systems,

by processing, manipulating, refining,

attribution of gross receipts (a) to a

executive systems, monitors,

or changing the form of an article, or

member of the EAG from the

compilers and translators, assembly

by combining or assembling two or

disposition of property an EAG

routines, utility programs, and

more articles.

partnership engaged in MPGE, and

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application programs.

Cultivating soil, raising livestock,

(b) to an EAG partnership from the

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Any incidental and ancillary rights

fishing, and mining minerals.

disposition of property another EAG

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that are necessary for the acquisition

Storage, handling, or other

partnership engaged in MPGE, both

of the title to, the ownership of, or the

processing activities (other than

of which are members of the same

right to use computer software, and

transportation activities) in the United

EAG. See Regulations section

that are used only in connection with

States related to the sale, exchange,

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

that specific software. These

or other disposition of agricultural

exceptions, and other rules.

incidental and ancillary rights are not

products, provided the products are

included in the definition of a

consumed in connection with, or

Cost of Goods Sold

trademark or trade name under

incorporated into, manufacturing,

For purposes of the DPAD, cost of

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

producing, growing, or extracting

goods sold includes the:

qualifying production property

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Exception. Computer software

Cost of goods sold to customers,

whether or not by the taxpayer.

does not include any data or

and

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information base unless the data or

Adjusted basis of non-inventory

For details, see Regulations

information base is in the public

property you sold or otherwise

section 1.199-3(e).

domain and is incidental to a

disposed of in your trade or business.

Qualifying in-kind partnerships. In

computer program.

Allocation of cost of goods sold.

general, partners of qualifying in-kind

Example. If a word processing

Generally, you must allocate your

partnerships are treated as MPGE

program includes a dictionary feature

cost of goods sold between DPGR

the property they receive as a

that may be used to spell-check a

and non-DPGR using a reasonable

distribution from the partnership. For

document then the entire program

method. If you use a method to

purposes of section 199, a qualifying

(including the dictionary feature) is a

allocate gross receipts between

in-kind partnership is a partnership

computer software program

DPGR and non-DPGR, the use of a

engaged in any of the following

regardless of the form in which the

different method to allocate cost of

activities.

dictionary feature is maintained or

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goods sold will not be considered

The extraction, refining, or

stored.

reasonable, unless it is more

processing of oil, natural gas (as

See Regulation section

accurate. However, if you qualify to

defined in Regulations section

1.199-3(j)(3) for more information.

use the small business simplified

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

overall method (discussed on page

Sound Recordings. Sound

products derived from oil, natural gas,

5), you can use it to apportion both

recordings include any works that

or petrochemicals, in whole or

cost of goods sold and other

result from the fixation of a series of

significant part within the United

deductions, expenses, and losses

musical, spoken, or other sounds.

States.

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between DPGR and non-DPGR.

The definition of sound recordings is

The production or generation of

limited to the master copy of the

electricity in the United States.

For details, see Regulations

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recordings (or other copy from which

The extraction and processing of

section 1.199-4.

the holder is licensed to make and

minerals (as defined in Regulations

Form W-2 wages. To determine the

produce copies), and if the medium

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

amount of Form W-2 wages to

(such as compact discs, tapes, or

United States.

include in cost of goods sold, see

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other phonorecordings) in which the

Any other industry or activity

Wage expense included in cost of

sounds may be embodied, is tangible,

designated as an industry or activity

goods sold, on page 8.

then the medium is considered

of a qualifying in-kind partnership by

tangible personal property.

publication in the Internal Revenue

Other Deductions, Expenses,

Bulletin.

Exception. Sound recordings do

or Losses

not include the creation of copy-

For more information on qualifying

Other deductions, expenses, or

righted material in a form other than a

in-kind partnerships, see Regulations

losses include all deductions,

sound recording, such as lyrics or

section 1.199-9(i), and Temporary

expenses, or losses (other than cost

music composition.

Regulations section 1.199-3T(i)(7).

of goods sold and employee business

See Regulation section

For qualifying in-kind partnerships

expenses) from a trade or business.

1.199-3(j)(4) for more information.

engaged solely in the extraction and

Allocation and apportionment of

processing of minerals, see Rev. Rul.

Manufacturing, Producing,

other deductions, expenses, or

2007-30 on page 1277 of I.R.B.

Growing, or Extracting

losses. You can generally use one

2007-21 at

Manufacturing, producing, growing,

of the following three methods to

irb07-21.pdf.

and extracting (MPGE) generally

allocate and apportion other trade or

include the following trade or

EAG Partnerships. A partnership is

business deductions, expenses, or

business activities.

an EAG partnership if a single EAG

losses between DPGR and

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Activities related to manufacturing,

owns all the interests in the capital

non-DPGR.

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producing, growing, extracting,

and profits of the partnership at all

Small business simplified overall

installing, developing, improving, and

times during the tax year. If the

method.

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creating qualifying production

requirements are met, the EAG

Simplified deduction method.

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property.

partnership and all members of the

Section 861 method.

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Instructions for Form 8903

Instructions For Form 8903 - Domestic Production Activities Deduction - 2007 Page 4

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