According to IRS Form 8903:
Your allowable Domestic Production Activities Deduction (DPAD) generally cannot be more than 9% of your Qualified Production Activities Income (QPAI). If you do not have QPAI, you generally are not allowed a DPAD.
QPAI is the result (if any) of:
- Domestic production gross receipts (DPGR) MINUS
- The sum of:
- Cost of goods sold allocable to DPGR plus
- Other expenses, losses, or deductions allocable to DPGR.
What is DPGR (Domestic Production Gross Receipts)?
Generally, your DPGR is the sum of your gross receipts from the following activities:
- Construction of real property that was performed in the U.S.
- Engineering or architectural services performed in the U.S.
- Any lease, rental, license, sale, exchange, or other disposition of any of the following:
- Qualifying production property you run, produce, grow or extract in whole or in significant part in the United States
- Any qualified film you produce, or
- Electricity, natural gas, or water you produced in the U.S.
Your DPGR does not include income derived from:
- The sale of food and drinks you prepared at a retail establishment;
- Property you leased, licensed, or rented for use by any related person;
- The transmission or distribution of electricity, natural gas, or water; or
- The leasing, renting, license sale, exchange, or other disposition of land.
Gross receipts include the following:
- Total sales (net of returns and allowances)
- Amounts received for services, not including wages received as an employee
- Income from incidental or outside sources (including sales of business property)
For more information regarding the Domestic Production Activities Deduction, please see the Instructions for Form 8903.