Instructions For Form 8903 - Domestic Production Activities Deduction

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Either of the two tests discussed on

Schedule K-1 that the shareholder

Estates and trusts. An estate or

page 5 under Simplified Deduction

needs to figure their DPAD.

trust that cannot use the simplified

Method.

deduction method must use the

Partnerships. A partnership can

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It has total cost of goods sold and

section 861 method to allocate and

choose to use the 861 method to

deductions added together of $100

apportion its indirectly allocable trade

figure QPAI at the entity level and

million or less.

or business deductions, expenses, or

allocate that QPAI to qualifying

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It has DPGR.

losses between DPGR and

partners (defined below) if it meets

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On every day during the current tax

non-DPGR. All estates and trusts

the requirements of an eligible 861

year, all of its shareholders or

must allocate directly allocable

partnership. A partner who is

partners are individuals, estates, or

deductions, expenses, or losses

allocated QPAI from an eligible 861

trusts described (or treated as

between DPGR and non-DPGR

partnership must report that QPAI on

described) in section 1361(c)(2).

under Regulations section 1.652(b)-3.

line 7. An eligible 861 partnership

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On every day during the current tax

must meet the following requirements

Adjusted Gross or

year, no shareholder or partner owns,

for its current tax year.

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alone or combined with the ownership

It has at least 100 partners on any

Taxable Income

interests of all related persons, more

day during the partnership’s tax year.

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

Your allowable DPAD generally

At least 70% of the partnership is

corporation or (b) the profits or capital

cannot be more than 6% of your

owned, at all times during its tax year,

interests in the partnership.

adjusted gross income if you are an

by qualifying partners (defined next).

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individual, estate, or trust (taxable

It has DPGR.

Estates and trusts. If eligible under

income for all other taxpayers) figured

the above rules, an estate or trust

Qualifying partner. A qualifying

without the DPAD. If you do not have

must use the simplified deduction

partner is a partner that, on each day

adjusted gross or taxable income,

method to allocate its indirectly

during the partnership’s tax year that

you generally are not allowed a

allocable trade or business

the partner owns an interest in the

DPAD. However, you do not need

deductions, expenses, or losses

partnership:

adjusted gross or taxable income to

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between DPGR and non-DPGR. All

Is not a general partner or a

claim a DPAD you are allocated as a:

estates and trusts must allocate

managing member of a partnership

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Patron of an agricultural or

directly allocable deductions,

organized as a limited liability

horticultural cooperative, or

expenses, or losses between DPGR

company,

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Member of an expanded affiliated

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and non-DPGR under Regulations

Does not materially participate

group.

section 1.652(b)-3.

(discussed below) in the activities of

Agricultural and horticultural

the partnership,

Expanded affiliated groups. For

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cooperatives. For this purpose,

Does not own, alone or combined

additional rules that apply to

figure taxable income without taking

with the interests of all related

expanded affiliated groups, see

into account any allowable deduction

persons (defined next), 5% or more of

Regulations section 1.199-4(e).

for patronage dividends, per-unit

the profits or capital interests in the

retain allocations, or nonpatronage

partnership,

Section 861 Method

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distributions.

Is not an ineligible partnership

You do not have to meet any tests to

(qualifying in-kind partnership or

Estates and trusts. See the

use the section 861 method. Under

expanded affiliated group partnership

instructions for line 11 on page 8 to

the section 861 method, you

as defined in Temporary Regulations

figure adjusted gross income.

generally must apply the rules of the

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

section 861 regulations to allocate

Unrelated business taxable income

Related persons. For purposes

and apportion other trade or business

(UBTI). The allowable DPAD of an

of determining whether a partner is a

deductions, expenses, or losses

organization taxed on its UBTI under

qualifying partner, persons are

between DPGR and non-DPGR.

section 511 generally cannot be more

related if they meet the requirements

Section 199 is treated as an

than 6% of its UBTI figured without

of sections 267(b) or 707(b),

“operative section” described in

the DPAD.

disregarding sections 267(e)(1) and

Regulations section 1.861-8(f).

(f)(1)(A).

Form W-2 Wages

For details, see Regulations

Material participation. A

section 1.199-4(d).

Your allowable DPAD generally

qualifying partner cannot materially

cannot be more than 50% of the

For guidance on automatic

participate in the activities of the

Form W-2 wages you paid to your

approval to change certain elections

partnership. See section 5.05 of Rev.

employees (including Form W-2

relating to the apportionment of

Proc. 2007-34 for the definition of

wages allocated to you on a

interest expense and research and

material participation.

Schedule K-1). If you did not pay

experimentation expenditures, see

Non-qualifying partners. An

Form W-2 wages, you generally are

Rev. Proc. 2006-42. You can find

eligible 861 partnership cannot

not allowed a DPAD. However, you

Rev. Proc. 2006-42 on page 931 of

allocate QPAI to non-qualifying

do not need Form W-2 wages to

I.R.B. 2006-47 at

partners (see Qualifying partner,

claim a DPAD you are allocated as a:

irs-irbs/irb06-47.pdf.

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above). Instead, the partnership must

Patron of an agricultural or

S corporations. An S corporation

report each non-qualifying partner’s

horticultural cooperative, or

cannot use the section 861 method to

share of deductions, expenses, or

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Member of an expanded affiliated

figure QPAI. Unless it is eligible to

losses on Schedule K-1 that the

group.

use the small business simplified

partner needs to figure their DPAD.

overall method or simplified deduction

The partnership items allocated to

Note. When figuring your DPAD, the

method, an S corporation must report

non-qualifying partners must be

limit equal to 50% of Form W-2

each shareholder’s share of its

excluded for purposes of computing

wages is based only on Form W-2

deductions, expenses, or losses on

QPAI at the partnership level.

wages properly allocable to DPGR.

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Instructions for Form 8903

Instructions For Form 8903 - Domestic Production Activities Deduction - 2007 Page 6

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