Common questions about Form 8903 and domestic production activities deductions in ProConnect Tax

Form 8903 computes the DPAD, which is generally 9% of the smaller qualified production activity income (QPAI), or adjusted gross income (AGI) if computed without DPAD.

The DPAD is further limited to 50% of W-2 wages that the taxpayer paid to employees.

Calculating the QPAI starts with domestic production gross receipts (DPGR). For a listing of what kinds of activities generate DPGR, see Instruction for Form 8903.

If you're a qualifying small taxpayer, use this method to apportion the cost of goods sold and deductions between DPGR and non-DPGR.

The total cost of goods sold and deductions are ratably apportioned between DPGR and other receipts based on relative gross receipts.

For example, the total cost of goods sold and deductions are $400. There are $1,000 in total receipts and $750 in DPGR. The DPGR equals 75% of total gross receipts. With this method, you can deduct $300 of the total cost of goods sold and deductions from DPGR.

Generally, the taxpayer is a qualifying small taxpayer if both average annual gross receipts and total costs for the current tax year are $5 million or less.

Under this method, allocated expenses are grouped together and reported on Form 8903, line 4, and lines 2 and 3 are skipped.

If you use the small business simplified overall method, you must apply it to all activities. So, if the program detects an activity on the return where you used the small business simplified overall method, the program will force the method on all activities.

Use this method to distribute other deductions, expenses, and losses (but not cost of goods sold) between DGPR and non-DGPR if you meet either of the following conditions:

• Total trade or business assets at the end of your tax year are $10 million or less
• Average annual gross receipts are $100 million or less

Under this method, other trade or business deductions, expenses, or losses are ratably apportioned between DPGR and non-DPGR based on relative gross receipts.

If you use the simplified deduction method, the method must be used for all activities. So, if the program detects an activity on the return where you used the simplified deduction method, the program will force the simplified deduction method on all activities. However, if the program detects the small business simplified overall method on a single activity, and the simplified deduction method on a single activity, the program will compute Form 8903 using the small business simplified overall method.

If you use the Section 861 method, you must apply the rules of Section 861 regulations to allocate and apportion deductions to gross income attributable to DPGR.

Under this method, all deduction lines (lines 2, 3, and 4) are completed on Form 8903.

If you choose to use this method, entries are required in "Allocable Cost of Goods Sold," "Directly Allocable Deductions, Expenses, or Losses," and "Indirectly Allocable Deductions, Expenses, or Losses."

The W2 wages reported to the shareholder or partner are limited to 9% of the partner or shareholder's share of QPAI derived from the partnership or S corporation.

Per form 8903 instructions, expenses are only taken into account to the extent they aren't disallowed by basis, at-risk, or passive limitations. The expenses disallowed will be taken into account in a future year. The program will track these disallowed expenses as a separate carryover.

When applying the small business simplified overall method or the simplified deduction method, expenses are allocated to DPGR based on the ratio of DPGR over total gross receipts.

For this reason, total gross receipts and total expenses include amounts from all trade or business activities, not just those that have domestic production gross receipts. The program considers the following activities, trade, or business activities for this purpose:

• Schedule C activities, including oil and gas working interests
• Schedule E rental activities (excluding royalty activities)
• Schedule F activities
• Schedule K-1 activities (when DPA information is provided)
• Form 4835 activities

Input fields are provided in the Schedule C, E (rental), and F input screens, allowing you to exclude an activity from DPAD calculations.

Per Form 8903 instructions, gross receipts include income from incidental or outside sources, including sales of business property.

The program treats the sales price as gross receipts (but not DPGR) and the adjusted basis as an expense when using the small business simplified overall or simplified deduction method.