Instructions For Form 8903 - Domestic Production Activities Deduction

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However, do not allocate and

net operating loss deduction. You

It has total cost of goods sold and

apportion a net operating loss

have $1,000 total gross receipts and

deductions added together of $5

deduction or deductions not

$750 DPGR. Your DPGR equal 75%

million or less.

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attributable to the conduct of a trade

of your total gross receipts. Under the

It has DPGR.

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or business to DPGR under any of

small business simplified overall

If a partnership, it does not have a

method, you subtract $300 ($400 ×

the methods.

partner that is an ineligible

.75) of your total cost of goods sold

partnership (qualifying in-kind

S corporations and

and other trade or business

partnerships or expanded affiliated

partnerships. S corporations and

deductions, expenses, or losses from

group partnerships as defined in

partnerships that meet specific

your DPGR to figure your QPAI,

Temporary Regulations section

requirements can choose to figure

which is $450 ($750 minus $300).

1.199-3T(i)(7) and (8)).

QPAI at the entity level and allocate

the QPAI to shareholders or partners.

Average annual gross receipts.

Expanded affiliated groups. For

S corporations or partnerships that

For this purpose, your average

additional rules that apply to

are not eligible to figure QPAI under

annual gross receipts are your

expanded affiliated groups, see

those rules, must report each

average annual gross receipts for the

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

shareholder’s or partner’s share of its

preceding 3 tax years. If your

deductions, expenses, or losses on

Simplified Deduction Method

business has not been in existence

Schedule K-1 with other information

for 3 tax years, base your average on

You generally can use the simplified

the shareholder or partner needs to

the period it has existed. Include any

deduction method to apportion other

figure their DPAD.

short tax years by annualizing the

deductions, expenses, and losses

Estates and trusts. An estate or

short tax year’s gross receipts by (a)

(but not cost of goods sold) between

trust allocates directly allocable trade

multiplying the gross receipts for the

DPGR and non-DPGR if you meet

or business deductions, expenses, or

short period by 12 and (b) dividing the

either of the following tests.

losses between DPGR and

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result by the number of months in the

Your total trade or business assets

non-DPGR under Regulations section

short period.

at the end of your tax year are $10

1.652(b)-3. An estate or trust that is

million or less.

Excluded entities. Estates and

eligible must use the simplified

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Your average annual gross

trusts cannot use the small business

deduction method to allocate

receipts (defined above) are $100

simplified overall method. Also,

indirectly allocable trade or business

million or less.

certain oil and gas partnerships and

deductions, expenses, or losses

certain partnerships owned by

between DPGR and non-DPGR.

Under the simplified deduction

expanded affiliated groups cannot

Otherwise, the estate or trust uses

method, your other trade or business

use the small business simplified

the section 861 method to allocate

deductions, expenses, or losses are

overall method.

these indirect items.

ratably apportioned between DPGR

and non-DPGR based on relative

Small Business Simplified

For details, see Regulations

gross receipts.

Overall Method

section 1.199-4(f).

Example. Your total other trade

You generally can use the small

S corporations and partnerships.

or business deductions, expenses, or

business simplified overall method to

An S corporation or partnership can

losses are $400 and do not include a

apportion cost of goods sold and

choose to use the small business

net operating loss. You have $240 of

other deductions, expenses, and

simplified overall method to figure

cost of goods sold allocable to

losses between DPGR and

QPAI at the entity level and allocate

DPGR. You have $1,000 total gross

non-DPGR if you meet any of the

that QPAI to shareholders or partners

following tests.

receipts and $600 DPGR. Your

if it meets the requirements of an

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DPGR equal 60% of your total gross

You are engaged in the trade or

eligible small pass-through entity. A

business of farming and are not

receipts. Under the simplified

shareholder or partner who is

required to use the accrual method of

deduction method, you subtract $240

allocated QPAI from an eligible small

($400 × .60) of your total other trade

accounting (see section 447).

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pass-through entity must report that

Your average annual gross

or business deductions, expenses, or

QPAI on line 7. An S corporation or

receipts (defined below) are $5

losses from your DPGR to figure your

partnership is an eligible small

million or less.

QPAI, which is $120 ($600 minus

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pass-through entity if it meets each of

You are eligible to use the cash

$240 minus $240).

the following requirements for the

method of accounting under Rev.

current tax year.

S corporations and partnerships.

Proc. 2002-28. You can find Rev.

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An S corporation or partnership can

It satisfies one of the following

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

choose to use the simplified

requirements: (a) it has average

2002-18 at

deduction method to figure QPAI at

annual gross receipts for the three tax

irb02-18.pdf.

the entity level and allocate that QPAI

years preceding the current tax year

Under the small business

to shareholders or partners if it meets

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

simplified overall method, your total

the requirements of an eligible

in the trade or business of farming

cost of goods sold and other

widely-held pass-through entity. A

and is not required to use the accrual

deductions, expenses, and losses are

shareholder or partner who is

method of accounting, or (c) it is

ratably apportioned between DPGR

allocated QPAI from an eligible

eligible to use the cash method of

and non-DPGR based on relative

widely-held pass-through entity must

accounting under Rev. Proc. 2002-28

gross receipts.

report that QPAI on line 7. An S

(that is, it has average annual gross

corporation or partnership is an

Example. Your total cost of

receipts of $10 million or less and is

eligible widely-held pass-through

goods sold and other trade or

not excluded from using the cash

entity if it meets each of the following

business deductions, expenses, or

method under Section 448 of the

requirements for its current tax year.

losses are $400 and do not include a

Internal Revenue Code).

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Instructions for Form 8903

Instructions For Form 8903 - Domestic Production Activities Deduction - 2007 Page 5

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