Instructions for Form 8903 (2006)

Specific Instructions

This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Table of Contents

Line 1 Domestic Production Gross Receipts (DPGR)

Enter your DPGR (defined on page 3).

Estates and trusts. Estates and trusts must reduce this amount if distributable net income (DNI) is distributed or required to be distributed to beneficiaries. For details, see Estates and trusts on page 2.

Line 2 Allocable Cost of Goods Sold

If you are not using the small business simplified overall method, enter your allocable cost of goods sold (discussed on page 3).

Estates and trusts. Estates and trusts must reduce the amount reported on line 2 if DNI is distributed or required to be distributed to beneficiaries. For details, see Estates and trusts on page 2.

Line 3

Estates and trusts must use Regulations section 1.652(b)-3 to allocate directly allocable trade or business deductions or losses between DPGR and non-DPGR. Enter the amount allocated to DPGR on line 3 after reducing it if DNI is distributed or required to be distributed to beneficiaries. For details, see Estates and trusts on page 2.

Line 4

If you are using the small business simplified overall method (discussed on page 4), enter the amount of cost of goods sold and other deductions or losses you ratably apportion to DPGR.

If you are using the simplified deduction method (also discussed on page 4), enter the other deductions or losses you ratably apportion to DPGR.

Estates and trusts. Estates and trusts must reduce this amount if DNI is distributed or required to be distributed to beneficiaries. For details, see Estates and trusts on page 2.

Line 7

Estates and trusts must reduce the amount reported on line 7 if DNI is distributed or required to be distributed to beneficiaries. For details, see Estates and trusts on page 2.

Line 9 Income 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 18 for exceptions.

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.

Line 12 Form W-2 Wages

Enter your Form W-2 wages (discussed on page 5). Do not include Form W-2 wages you must report on line 13.

Estates and trusts. Estates and trusts must reduce this amount if DNI is distributed or required to be distributed to beneficiaries. For details, see Estates and trusts on page 2.

Line 13

Estates and trusts must reduce the amount reported on line 13 if DNI is distributed or required to be distributed to beneficiaries. For details, see Estates and trusts on page 2.

Line 18 Expanded 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 below.

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 begins after 2004 and 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 Final or Proposed Regulations section 1.199-7(h)(2) as discussed under Additional Guidance on page 1.

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.

Section 199 closing of the books method. Under the section 199 closing of the books method, a corporation's taxable income or loss, QPAI, and Form W-2 wages for the period during which the corporation was a member of the EAG are figured by treating the corporation's tax year as two separate tax years. The first tax year is treated as ending on the close of the day on which the corporation's status as a member of the EAG changes. The second tax year is treated as beginning on the day after the corporation's status as a member of the EAG changes.

Making the section 199 closing of the books election. A corporation makes the section 199 closing of the books election by attaching the following statement to the corporation's timely filed (including extensions) federal income tax return for the tax year that includes the periods that are subject to the election: "The section 199 closing of the books election is hereby made with respect to [insert name of corporation and its employer identification number] with respect to the following periods [insert dates of two periods between which items are allocated pursuant to the closing of the books method]."

If you filed your original return on time without making the election, you can make the election on an amended return filed no later than 6 months after the due date of your tax return (excluding extensions). Enter “Filed pursuant to section 301.9100-2” at the top of the amended return.

Once made, the election is irrevocable.

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 Final or Proposed Regulations section 1.199-7(d)(4) as discussed under Additional Guidance on page 1.

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 Final Regulations section 1.199-7(d)(4) or see section 4.09(4) of Notice 2005-14 and Proposed Regulations section 1.199-7(d)(4) as discussed under Additional Guidance on page 1.

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 to figure the DPAD for all EAG members with the same tax year. The reporting member completes lines 8 through 12 and lines 14 through 16 of the Form 8903 for the group.

The reporting member also does the following.

Enters the portion of the deduction allocated to the other members of the EAG as a negative number on line 18.
Completes lines 17 and 19.
Attaches a schedule showing how the reporting member figured its own QPAI.
Attaches a schedule that shows how the DPAD was figured for the group and each member's name, EIN, and share of the DPAD.
Provides a copy of the group DPAD computation schedule to the other members of the group.

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

Completes a separate Form 8903, skips lines 1-16, and enters its share of the group deduction on line 18 as a positive number.
Completes lines 17 and 19.
Attaches a schedule that shows how its QPAI was figured.
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 19 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 19 Domestic Production Activities Deduction

Combine lines 16 through 18 and enter the result on line 19 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 19, which includes any amount allocated to patrons, is deductible under section 199 by the cooperative.