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average annual gross receipts for the

Example. Your total other trade or

information shareholders or partners

preceding 3 tax years. If your

business deductions, expenses, or

need to separately figure QPAI

business has not been in existence

losses are $400 and do not include a

(unless the S corporation or

for 3 tax years, base your average on

net operating loss. You have $1,000

partnership is using the small

the period it has existed. Include any

total gross receipts and $600 DPGR.

business simplified overall method).

short tax years by annualizing the

Your DPGR equal 60% of your total

Estates and trusts. An estate or

short tax year’s gross receipts by (a)

gross receipts. Under the simplified

trust that cannot use the simplified

multiplying the gross receipts for the

deduction method you can subtract

deduction method must use the

$240 ($400 × .60) of your total other

short period by 12 and (b) dividing the

section 861 method to allocate and

result by the number of months in the

trade or business deductions,

apportion its indirectly allocable trade

short period.

expenses, or losses from your DPGR

or business deductions, expenses, or

to figure your QPAI.

losses between DPGR and

Excluded entities. The following

S corporations and partnerships.

non-DPGR. All estates and trusts

entities cannot use the small

must allocate directly allocable

S corporations and partnerships

business simplified overall method.

•

cannot use the simplified deduction

deductions, expenses, or losses

Estates and trusts.

•

method to figure QPAI. Instead, they

between DPGR and non-DPGR

Qualifying oil and gas partnerships.

•

under Regulations section 1.652(b)-3.

must include on Schedule K-1 the

Certain partnerships owned by

information shareholders or partners

expanded affiliated groups.

Adjusted Gross or

need to separately figure QPAI

For details, see Proposed

(unless the S corporation or

Taxable Income

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

partnership is using the small

Your allowable DPAD generally

business simplified overall method).

S corporations and partnerships. If

cannot be more than 3% of your

eligible under the above rules, an

Estates and trusts. If eligible under

adjusted gross income if you are an

S corporation or partnership can use

the above rules, an estate or trust

individual, estate, or trust (taxable

the small business simplified overall

must use the simplified deduction

income for all other taxpayers) figured

method to figure QPAI, which it can

method to allocate its indirectly

without the DPAD. If you do not have

then allocate to shareholders or

allocable trade or business

adjusted gross or taxable income,

partners on Schedule K-1. A

deductions, expenses, or losses

you generally are not allowed a

shareholder or partner who is

between DPGR and non-DPGR. All

DPAD. However, you do not need

allocated QPAI from an S corporation

estates and trusts must allocate

adjusted gross or taxable income to

or partnership must report that QPAI

directly allocable deductions,

claim a DPAD you are allocated as a:

on line 7. However, the shareholder

expenses, or losses between DPGR

•

Patron of an agricultural or

or partner may figure QPAI from other

and non-DPGR under Regulations

horticultural cooperative, or

sources using any method for which

section 1.652(b)-3.

•

Member of an expanded affiliated

the shareholder or partner is eligible.

Expanded affiliated groups. For

group.

Expanded affiliated groups. For

additional rules that apply to

Cooperatives. For this purpose,

additional rules that apply to

expanded affiliated groups, see

figure taxable income without taking

expanded affiliated groups, see

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

into account any allowable deduction

section 4.05(5) of Notice 2005-14 and

and Proposed Regulations section

for patronage dividends, per-unit

Proposed Regulations section

1.199-4(e)(2).

retain allocations, or nonpatronage

1.199-4(f)(3).

Section 861 Method

distributions.

Simplified Deduction Method

You do not have to meet any tests to

Estates and trusts. See the

use the section 861 method. Under

instructions for line 9 on page 6 to

You generally can use the simplified

the section 861 method, you

figure adjusted gross income.

deduction method to apportion other

generally must apply the rules of the

deductions, expenses, and losses

Unrelated business taxable income

section 861 regulations to allocate

(but not cost of goods sold) between

(UBTI). The allowable DPAD of an

and apportion other trade or business

DPGR and non-DPGR if you meet

organization taxed on its UBTI under

deductions, expenses, or losses

either of the following tests.

section 511 generally cannot be more

•

between DPGR and non-DPGR.

Your total trade or business assets

than 3% of its UBTI figured without

Section 199 is treated as an

at the end of your tax year are $10

the DPAD.

“operative section” described in

million or less.

•

Regulations section 1.861-8(f).

Form W-2 Wages

Your average annual gross

receipts (defined on page 3) are $25

For details, see section 4.05(3)(c)

Your allowable DPAD generally

million or less.

of Notice 2005-14 and Proposed

cannot be more than 50% of the

Regulations section 1.199-4(d).

Under the simplified deduction

Form W-2 wages you paid to your

method, your other trade or business

S corporations and partnerships.

employees. If you did not pay Form

deductions, expenses, or losses are

S corporations and partnerships

W-2 wages, you generally are not

ratably apportioned between DPGR

cannot use the section 861 method to

allowed a DPAD. However, you do

and non-DPGR based on relative

figure QPAI. Instead, they must

not need Form W-2 wages to claim a

gross receipts.

include on Schedule K-1 the

DPAD you are allocated as a:

-4-

Instructions for Form 8903

Instructions For Form 8903 - Domestic Production Activities Deduction - Internal Revenue Service - 2005 Page 4

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