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Schedule K-1 with other information

operating loss deduction. You have

(but not cost of goods sold) between

the shareholder or partner needs to

$1,000 total gross receipts and $750

DPGR and non-DPGR if you meet

figure their DPAD. However, an S

DPGR. Your DPGR equal 75% of

either of the following tests.

•

corporation or partnership with a tax

your total gross receipts. Under the

Your total trade or business assets

year beginning before May 18, 2006,

small business simplified overall

at the end of your tax year are $10

method, you subtract $300 ($400 ×

may qualify to use the small business

million or less.

•

simplified overall method to apportion

.75) of your total cost of goods sold

Your average annual gross

both cost of goods sold and other

and other trade or business

receipts (defined above) are $100

deductions, expenses, and losses

deductions, expenses, or losses from

million or less ($25 million or less if

between DPGR and non-DPGR. If

your DPGR to figure your QPAI.

you choose not to rely on any part of

eligible, the S corporation or

the final regulations as discussed

Average annual gross receipts.

partnership can figure QPAI at the

under Additional Guidance on page

For this purpose, your average

entity level and report each

1).

annual gross receipts are your

shareholder’s or partner’s share of

average annual gross receipts for the

Under the simplified deduction

QPAI on Schedule K-1 with other

preceding 3 tax years. If your

method, your other trade or business

information (Form W-2 wages) the

business has not been in existence

deductions, expenses, or losses are

shareholder or partner needs to figure

for 3 tax years, base your average on

ratably apportioned between DPGR

their DPAD. For details, see Small

the period it has existed. Include any

and non-DPGR based on relative

Business Simplified Overall Method

short tax years by annualizing the

gross receipts.

below.

short tax year’s gross receipts by (a)

Example. Your total other trade or

multiplying the gross receipts for the

Estates and trusts. An estate or

business deductions, expenses, or

short period by 12 and (b) dividing the

trust allocates directly allocable trade

losses are $400 and do not include a

result by the number of months in the

or business deductions, expenses, or

net operating loss. You have $1,000

short period.

losses between DPGR and

total gross receipts and $600 DPGR.

non-DPGR under Regulations section

Excluded entities. Estates and

Your DPGR equal 60% of your total

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

trusts cannot use the small business

gross receipts. Under the simplified

eligible must use the simplified

simplified overall method. Also,

deduction method, you subtract $240

deduction method to allocate

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

certain oil and gas partnerships and

indirectly allocable trade or business

certain partnerships owned by

or business deductions, expenses, or

deductions, expenses, or losses

expanded affiliated groups cannot

losses from your DPGR to figure your

between DPGR and non-DPGR.

use the small business simplified

QPAI.

Otherwise, the estate or trust uses

overall method if they rely on Notice

S corporations and partnerships.

the section 861 method to allocate

2005-14 and the Proposed

S corporations and partnerships

these indirect items.

Regulations as discussed under

cannot use the simplified deduction

Additional Guidance on page 1.

method to figure QPAI. See S

Small Business Simplified

For details, see Final Regulations

corporations and partnerships on

Overall Method

section 1.199-4(f) or see Proposed

page 3.

You generally can use the small

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

Estates and trusts. If eligible under

business simplified overall method to

discussed under Additional Guidance

the above rules, an estate or trust

apportion cost of goods sold and

on page 1.

must use the simplified deduction

other deductions, expenses, and

S corporations and partnerships. If

method to allocate its indirectly

losses between DPGR and

eligible under the above rules, an

allocable trade or business

non-DPGR if you meet any of the

S corporation or partnership with a

deductions, expenses, or losses

following tests.

•

tax year beginning before May 18,

between DPGR and non-DPGR. All

You are engaged in the trade or

2006, can use the small business

estates and trusts must allocate

business of farming and are not

simplified overall method to figure

directly allocable deductions,

required to use the accrual method of

QPAI, which it can then allocate to

expenses, or losses between DPGR

accounting (see section 447).

•

shareholders or partners on Schedule

and non-DPGR under Regulations

Your average annual gross

K-1. A shareholder or partner who is

section 1.652(b)-3.

receipts (defined below) are $5

allocated QPAI from an S corporation

million or less.

Expanded affiliated groups. For

•

or partnership must report that QPAI

You are eligible to use the cash

additional rules that apply to

on line 7. However, the shareholder

method of accounting under Revenue

expanded affiliated groups, see Final

or partner may figure QPAI from other

Procedure 2002-28. You can find

Regulations section 1.199-4(e) or see

sources using any method for which

Revenue Procedure 2002-28 on page

section 4.05(3)(d) of Notice 2005-14

the shareholder or partner is eligible.

815 of I.R.B. 2002-18 at

and Proposed Regulations section

pub/irs-irbs/irb02-18.pdf.

Expanded affiliated groups. For

1.199-4(e)(2) as discussed under

additional rules that apply to

Additional Guidance on page 1.

Under the small business

expanded affiliated groups, see Final

simplified overall method, your total

Section 861 Method

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

cost of goods sold and other

You do not have to meet any tests to

see section 4.05(5) of Notice 2005-14

deductions, expenses, and losses are

use the section 861 method. Under

and Proposed Regulations section

ratably apportioned between DPGR

the section 861 method, you

1.199-4(f)(3) as discussed under

and non-DPGR based on relative

generally must apply the rules of the

Additional Guidance on page 1.

gross receipts.

section 861 regulations to allocate

Simplified Deduction Method

Example. Your total cost of goods

and apportion other trade or business

sold and other trade or business

You generally can use the simplified

deductions, expenses, or losses

deductions, expenses, or losses are

deduction method to apportion other

between DPGR and non-DPGR.

$400 and do not include a net

deductions, expenses, and losses

Section 199 is treated as an

-4-

Instructions for Form 8903

Instructions For Form 8903 - Domestic Production Activities Deduction - Internal Revenue Service - 2006 Page 4

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