Specific Instructions

Table of Contents

Complete lines 1 through 10, column (a), only if you have oil-related production activities. All others, do not complete lines 1 through 9, column (a), and enter zero on line 10a.

Enter amounts for all activities (including oil-related production activities) on lines 1 through 10, column (b).

Line 1Domestic Production Gross Receipts (DPGR)

Enter your DPGR (defined on page 3).

Line 2Allocable Cost of Goods Sold

If you are not using the small business simplified overall method, enter your cost of goods sold allocable to DPGR (discussed on page 5).

Line 3

If you are using the simplified deduction method (discussed on page 6), enter the other deductions or losses you ratably apportion to DPGR. If you are using the section 861 method (discussed on page 6), enter the other deductions or losses you allocate and apportion to DPGR. If you are using small business simplified overall method, see the instructions for line 4, below.

Oil-related production activities.    If you use the simplified deduction method to calculate the other deductions or losses reported on line 3, column (b), you must make an additional calculation to determine the amount to report on line 3, column (a). Multiply the amount reported on line 3, column (b), by the ratio of oil-related DPGR reported on line 1, column (a) divided by DPGR from all activities reported on line 1, column (b). Enter the result on line 3, column (a). Do not reduce the amount reported on line 3, column (b), by this amount.

  If you use the section 861 method, apply the rules of section 861 to determine the amount to report on line 3, column (a). If you are using the small business simplified overall method, see Oil-related production activities, under the instructions for line 4, next.

Line 4

If you are using the small business simplified overall method (discussed on page 5), enter the amount of cost of goods sold and other deductions or losses you ratably apportion to DPGR.

Oil-related production activities.   If you use the small business simplified overall method to calculate the cost of goods sold and other deductions, expenses, and losses reported on line 4, column (b), you must make an additional calculation to determine the amount to report on line 4, column (a). Multiply the amount reported on line 4, column (b), by the ratio of oil-related DPGR reported on line 1, column (a), divided by DPGR from all activities reported on line 1, column (b). Enter the amount on line 4, column (a). Do not reduce the amount reported on line 4, column (b), by this amount.

Line 7

Beneficiaries of estates and trusts, partners, and S corporation shareholders report the QPAI distributed from estates or trusts, and certain partnerships or S corporations on line 7. The QPAI should be reported to you on Schedule K-1 for Forms 1041, 1065, or 1120S. See the related Schedule K-1 and its instructions for more information.

Line 9

Estates and trusts must use Regulations section 1.652(b)-3 to allocate QPAI to beneficiaries if DNI is distributed or required to be distributed to beneficiaries. Report the amount of QPAI allocated to beneficiaries on line 9. See Estates and trusts on page 2.

Line 10a Oil-related Qualified Production Activities Income

Add lines 1 through 9, column (a), to determine oil-related qualified production activities income. If you do not have oil-related qualified production activities income, do not complete lines 1 through 9, column (a), and enter zero on line 10a.

Line 11Income Limitation

Individuals.   Enter your adjusted gross income from line 37 of Form 1040 figured without the DPAD.

Corporations.   Enter your taxable income from the applicable line of your tax return (for example, line 30 of Form 1120) figured without the DPAD.

Members of EAGs.

See the instructions for line 24.

Agricultural and horticultural cooperatives.   Enter your taxable income figured without the DPAD or the deductions for patronage dividends, per-unit retain allocations, and nonpatronage distributions under section 1382(b) or (c).

Estates and trusts.   Enter your adjusted gross income figured without the DPAD. See the Instructions for Form 1041 to figure adjusted gross income. Use the method discussed under How to figure AGI for estates and trusts, under Line 15b—Allowable Miscellaneous Itemized Deductions Subject to the 2% Floor.

Unrelated business taxable income (UBTI).   An organization taxed on its UBTI under section 511 enters its UBTI from line 34 of Form 990-T figured without the DPAD.

  

Note.

If you have extraterritorial income (ETI), figure taxable income without regard to any claimed ETI exclusions.

See Regulations section 1.199-1(b)(1) for more information.

Line 14a

If you have oil-related qualified production income, use line 14a to determine the least of the following amounts.

  • Oil-related QPAI—line 10a,

  • QPAI—line 10b, or

  • Adjusted gross income for an individual, estate, or trust (taxable income for all other taxpayers)—line 11.

All others, enter zero on line 14a.

Line 14b Reduction for Oil-related Qualified Production Activities Income

If you have oil-related qualified production income, use line 14b to reduce your DPAD by 3% of the amount reported on line 14a.

All others, enter zero on line 14b.

Line 16Form W-2 Wages

Enter your Form W-2 wages that are properly allocable to DPGR (discussed on page 8). Do not include Form W-2 wages you must report on line 17.

Line 17

Beneficiaries of estates and trusts, partners, and S corporation shareholders report the Form W-2 wages distributed from estates or trusts, and certain partnerships or S corporations on line 17. The Form W-2 wages should be reported to you on the Schedule K-1 for Forms 1041, 1065, or 1120S. See the related Schedule K-1 and its instructions for more information.

Line 19

Estates and trusts must use Regulations section 1.652(b)-3 to allocate Form W-2 wages to beneficiaries if DNI is distributed or required to be distributed to beneficiaries. Report the amount of the Form W-2 wages allocated to beneficiaries on line 19. See Estates and trusts on page 2.

Line 24Expanded Affiliated Group Allocation

The instructions below explain how expanded affiliated groups (EAGs) (defined on page 2) figure and report the DPAD. Certain members of an expanded affiliated group may not be required to complete the entire Form 8903. See How To Report on page 10.

Computation of the EAG's DPAD

In general, the DPAD for an EAG is determined by aggregating each member's taxable income or loss, QPAI, and Form W-2 wages. A member's QPAI may be positive or negative. Also, a member's taxable income or loss and QPAI are determined under the member's method of accounting.

Members with different tax years.   If members of an EAG have different tax years, in determining the DPAD of a member, the reporting member must take into account the taxable income or loss, QPAI, and Form W-2 wages of each group member that are both:

  • Attributable to the period that the member of the EAG and the reporting member are both members of the EAG, and

  • Taken into account in a tax year that ends with or within the tax year of the reporting member with respect to which the DPAD is figured.

  For an example that explains the above requirements, see Regulations section 1.199-7.

Net operating losses.   The net operating loss (NOL) of a member of an EAG that is used in the computation of the EAG's taxable income is not treated as an NOL carryback or carryover to determine the taxable income limitation in a prior or subsequent year for purposes of section 199(a)(1)(B). See Regulations section 1.199-7(b)(4) for more information.

Allocation of the DPAD to Members of the EAG

The EAG's DPAD is allocated among members of the EAG based on the ratio of each member's QPAI to the total QPAI of the EAG. The allocation is made regardless of whether the EAG member has taxable income or loss or Form W-2 wages for the tax year. If a member has negative QPAI, that member's QPAI is treated as zero for purposes of the allocation.

Consolidated Groups

Under section 199, a consolidated group is treated as a single member of the EAG. If all members of an EAG are members of the same consolidated group, the DPAD of the consolidated group is determined based on the consolidated taxable income or loss, QPAI, and Form W-2 wages of the group and not the separate taxable income or loss, QPAI, and Form W-2 wages of its members. The consolidated group will generally file only one Form 8903. For details, see Regulations section 1.199-7.

If an EAG includes both consolidated and non-consolidated members, the consolidated (not separate) taxable income or loss, QPAI, and Form W-2 wages of the consolidated group are aggregated with the taxable income or loss, QPAI, and Form W-2 wages of the non-consolidated group members to determine the DPAD. For details, see Regulations section 1.199-7(d)(4).

A consolidated group's DPAD (or the DPAD allocated to a consolidated group that is a member of an EAG) is allocated to the members of the consolidated group in proportion to each member's QPAI, if any, regardless of whether the consolidated group member has:

  • Separate taxable income or loss for the tax year, and

  • Form W-2 wages for the tax year.

For purposes of allocating the DPAD of a consolidated group among its members, if a consolidated group member has negative QPAI, the member's QPAI is treated as zero.

Simplified deduction and small business simplified overall methods.   For purposes of applying the simplified deduction method and the small business simplified overall method, a consolidated group determines its QPAI by reference to its members' DPGR, non-DPGR, cost of goods sold, and all other deductions, expenses, or losses, determined on a consolidated basis.

How To Report

All members of an EAG are treated as a single corporation for purposes of determining the DPAD. However, the DPAD is allocated to each member.

EAG reporting member.   The EAG chooses a reporting member from amongst all members of the EAG with the same tax year to figure the DPAD for all EAG members (computing members). The reporting member completes lines 10a through 16 and lines 18 through 22 of the Form 8903 for the group.

The reporting member also does the following.

  1. Enters the portion of the deduction allocated to the other members of the EAG (including non-computing members) as a negative number on line 24.

  2. Completes lines 23 and 25.

  3. Attaches a schedule showing how the reporting member figured its own QPAI.

  4. Attaches a schedule that shows how the DPAD was figured for the group and each member's name, EIN, and share of the DPAD.

  5. Provides a copy of the group DPAD computation schedule to the other computing members of the group.

EAG computing member other than the reporting member.   An EAG computing member other than the reporting member does the following.

  1. Completes a separate Form 8903, skips lines 1-22, and enters its share of the group deduction on line 24 as a positive number.

  2. Completes lines 23 and 25.

  3. Attaches a schedule showing how the computing member figured its own QPAI.

  4. Attaches a copy of the group DPAD computation schedule provided by the reporting member.

Consolidated groups.   If the EAG is comprised of a single consolidated group, the common parent of the consolidated group completes lines 1 through 25 for the group. If the EAG is comprised of more than just the members of a single consolidated group, the common parent files a Form 8903 for the consolidated group as either the reporting member or as an EAG member other than the reporting member, whichever is appropriate. In all events, the common parent attaches a schedule that shows the amount of the consolidated group's DPAD allocated to each member of the consolidated group, and how the allocated amount was calculated.

Line 25Domestic Production Activities Deduction

Combine lines 22 through 24 and enter the result on line 25 and the appropriate line of your tax return.

Agricultural and horticultural cooperatives

Reduce the amount the cooperative deducts under section 1382 by the portion of the cooperative's DPAD allocated to its patrons. However, the entire amount on line 25, which includes any amount allocated to patrons, is deductible under section 199 by the cooperative. See Agricultural and horticultural cooperatives on page 2 for more information on this subject.

How to report.   Cooperatives are not permitted to net patronage losses with nonpatronage income. Therefore, they must compute taxable income from patronage or nonpatronage activities separately on Schedule G, Form 1120-C.

Patronage income and deductions only.

Cooperatives that have only patronage income and deductions generally complete the Form 8903 as described earlier in the instructions.

Patronage and nonpatronage income and deductions.

Cooperatives with both patronage and nonpatronage income or deductions must follow the below instructions for completing Form 8903.

Report the total amount of the DPAD to be claimed on Form 1120-C on line 25 of Form 8903, and leave lines 1 to 24 blank. Attach to Form 8903 separate calculations of the DPAD from patronage and nonpatronage activities, which conform to lines 1 to 24 of the Form 8903.

Enter the DPAD from patronage and nonpatronage sources reported on the attachment, on line 6a, column (a), Patronage, and line 6a, column (b), Nonpatronage, respectively, of Schedule G, Form 1120-C.

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