Exporters previously used another deduction known as the extraterritorial income exclusion to reduce taxes, but a World Trade Organization ruling in 2004 stated that this deduction is an illegal trade subsidy. The IRS created the domestic production activities deduction under Section 199 of the tax code along with Form 8903 to help American exporters in a way that would not violate international trade agreements.
Farms qualify for the deduction since they grow crops and raise animals, so the farm produces domestic products. The deduction applies to animals a farmer intends to sell, so breeding stock and milk cows that the farmer intends to keep do not qualify for the deduction.
The domestic production activities deduction is an incentive for manufacturers to hire American employees. A business cannot deduct more than 50 percent of the total wages it pays to employees and reports on Form W-2 using this deduction. According to the National Tax Information Service, a farmer may not include non-cash payments -- such as corn, rice or other farm products that workers receive instead of money -- when calculating the maximum deduction.
Many types of taxpayers may file Form 8903. The deduction is available to an individual taxpayer, a partnership a public or private corporation, and an estate or trust. According to the University of Wisconsin, an estate or a trust may not claim the domestic production activities deduction if the organization passes its income through to other taxpayers instead of filing its own tax return.
Exceptions apply to the qualified production income deduction. A restaurant may not claim the cost of the soft drinks and food that it sells as qualifying production activities, according to the the University of Wisconsin. The production tax deduction also does not apply to companies that resell energy that another power company produces. Retailers who do not manufacture their own items and companies that perform minor work such as placing labels on imported products both do not qualify for the Form 8903 deduction.