Qualified Production Activities Income (QPAI): What Is It?
Are you in the business of manufacturing? Where do you conduct the majority of your business? It can be common for businesses to manufacture their goods overseas to help keep costs down.
This is why the government introduced the qualified production activities income (QPAI). It’s intended to help reward those that manufacture domestically. Read on to learn all about how it worked, how to calculate it, and more!
Note: the QPAI and QPAD (Qualified Production Activities Deductions) have been repealed for tax years after 2017.
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KEY TAKEAWAYS
- The qualified production activities income (QPAI) is a specific amount that can help reduce taxable income.
- QPAI is the difference between the domestic gross receipts of the manufacturer and the cost of goods sold.
- The main goal of QPAI is to reward manufacturers for choosing to manufacture their goods domestically instead of abroad.
What Is the Qualified Production Activities Income (QPAI)?
The Qualified Production Activities Income (QPAI) is a certain amount of income that qualifies for a reduction in taxation. QPAI relates to the amount of income that comes from domestic manufacturing and production.
Qualified production activities income is the actual difference between two things. They are the total cost of goods and services and the manufacturer’s domestic gross receipts. And this is in relation to producing domestic goods.
The purpose of QPAI is to reward the manufacturers that produce goods domestically. This is rather than in another country somewhere overseas.
How Does QPAI Work?
The details of QPAI are outlined in section 199 of the Internal Revenue Code (IRC). It dictates that any qualified productive income should get taxed at a lower rate.
QPAI specifically relates to certain types of income that comes from manufacturing. It considers whether it’s equal to excess business taxpayer’s domestic production gross receipts (DPGR). Plus, it takes into account the sum of the cost of the goods. It also considers other losses, expenses, or deductions allocated to specific receipts.
Domestic production gross receipts (DPGR) are obtained in a few ways. It can be through extracting, growing, producing, or manufacturing qualifying production property. Any company generating QPAI is eligible for the domestic production activities deduction (DPAD). This is as long as it’s within a qualifying tax year.
Generally, the allowable DPAD for a business can’t exceed 9% of its QPAI.
According to the IRC Section 199, qualified production activities must meet certain criteria. These activities include:
- Certain engineering and architectural services used in a construction project based in the US.
- Various types of contraction projects throughout the US. This can include renovating or building a residential or commercial property.
- Any manufacturing conducted from within the US.
- Motion pictures that have been sold, leased, or licensed and were produced at least 50% in the US.
- Various types of software development throughout the US, such as video game development.
If your business only engages or takes part in one line of business, QPAI is going to be the same as your gross income. But what if you have multiple streams of income? In this case, you will have to allocate different incomes.
QPAI doesn’t include any revenue that’s generated from real estate transactions. It also doesn’t include the restaurant industry. Or the distribution of natural gas or electricity. Most trusts, estates, cooperatives, corporations, and individuals are going to use the same forms.
They’ll use IRS Form 8903 to determine and calculate their allowable QPAI. Form W-2 wages and QPAI only consider items related to conducting business or trade.
How Is QPAI Calculated?
In most cases, your allowable DPAD can’t exceed 9% of your QPAI. You don’t need a QPAI to claim a DPAD, but you often can’t get a DPAD if you don’t have QPAI.
To determine QPAI there aren’t many calculations to do, you just need to have a few bits of information. You’re going to need to know your:
- DPGR
- Cost of goods sold applicable to DPGR
- Any other expenses, deductions, or losses
To calculate QPAI, it’s any excess of your domestic production gross receipts (DPGR)
Over the sum of:
- The cost of goods sold that are applicable to DPGR
- Any other expenses, deductions, or losses that are applicable to DPGR
Why Does QPAI Matter?
The main purpose of qualified production activities income is to encourage and reward manufacturers. Manufacturers can receive benefits in return for producing their goods domestically in the United States.
QPAI first came into existence when the American Job Creations Act was launched in 2004. It’s worth mentioning that the QPAI deduction limit is capped at 50% of your W-2 wages wanted during the calendar year. QPAI is available on a federal level and depending on the state it could also exist at the state level.
Summary
If a business takes part in domestic manufacturing and production, there could be an opportunity for reduced taxation if they are eligible. When this happens it’s what’s called qualified production activities income (QPAI).
QPAI ends up being the difference between the domestic gross receipts of the manufacturer and the aggregate cost of goods and services when it comes to producing domestic goods in the U.S. The main purpose of QPAI is to reward manufacturers for choosing to produce their products and goods domestically instead of somewhere abroad.
FAQs About Qualified Production Activities Income
The domestic production activities deduction is no longer used. It was replaced in 2017 when the Tax Cuts and Jobs Act (TCJA) of 2017 was introduced. Individuals now use the qualified business income deduction.
If you need to report a loss from qualified production activities income, you will do this on the Internal Revenue Service (IRS) Form 8903.
To determine your domestic production activities income and any other relevant details, you can find the right information under Section 199 of the United States Internal Revenue Code.
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