# Qualified Production Activities Income (QPAI): Overview

## What Is the Qualified Production Activities Income?

Qualified Production Activities Income (QPAI) is the portion of income derived from domestic manufacturing and production that qualifies for reduced taxation. More specifically, qualified production activities income is the difference between the manufacturer's domestic gross receipts and aggregate cost of goods and services related to producing domestic goods.﻿﻿ The tax-deductibility of QPAI is intended to reward manufacturers for producing goods domestically instead of overseas.

## Understanding Qualified Production Activities Income (QPAI)

Section 199 of the Internal Revenue Code (IRC) mandates that Qualified Production Activities Income (QPAI) be taxed at a lower rate.﻿﻿ QPAI refers to certain income related to manufacturing that is equal to the excess of the business taxpayer's domestic production [gross receipts](https://www.investopedia.com/terms/g/gross-receipts.asp) (DPGR) over the sum of the cost of goods that are allocable to such receipts, and other expenses, losses, or [deductions](https://www.investopedia.com/terms/d/deduction.asp) which are properly allocable to such receipts. Domestic production gross receipts (DPGR) are gross receipts from the manufacture, production, growth, or extraction of qualifying production property. A company that generates QPAI in a qualifying tax year qualifies for the [domestic production activities deduction](https://www.investopedia.com/terms/d/domestic-production-activities-deduction.asp) (DPAD).﻿﻿

U.S.-based business’ allowable DPAD generally cannot be more than 9% of its QPAI. A taxpayer with oil-related QPAI also must reduce the DPAD by 3% of the least of the following amounts – Oil-related QPAI, QPAI, and [adjusted gross income](https://www.investopedia.com/terms/a/agi.asp) for an individual, estate, or trust (taxable income for all other taxpayers) figured without DPAD.﻿﻿ In addition, the deduction is limited to 50% of the [W-2 wages](https://www.investopedia.com/terms/w/w2form.asp) paid by the taxpayer during the calendar year that ends with (or within) the tax year. An employer that did not pay any Form W-2 wages (or have Form W-2 wages allocated to him/her on a [Schedule K-1](https://www.investopedia.com/terms/s/schedule-k-1.asp)), cannot claim a DPAD.﻿﻿ The DPAD was in effect for small and large U.S.-based business activities between 2005 and 2017 and expired on December 31, 2017.﻿﻿

IRC Section 199 defines qualified production activities to include:

*   Manufacturing conducted in the U.S.
*   Selling, leasing, or licensing motion pictures that have been produced at least 50% in the U.S.
*   Construction projects in the U.S., including building and renovation of residential and commercial properties
*   Engineering and architectural services relating to a U.S.-based construction project
*   Software development in the U.S., including the development of video games﻿﻿

QPAI will be the same as [gross income](https://www.investopedia.com/terms/g/grossincome.asp) for a business that engages in only one line of business, but businesses with multiple lines of businesses must allocate their incomes.﻿﻿

Individuals, corporations, cooperatives, estates, and trusts use IRS Form 8903 to figure their allowable qualified production activities income. QPAI and Form W-2 wages are figured by only taking into account items that are attributable to the actual conduct of a trade or business. QPAI does not include revenue generated from the restaurant industry, electricity or natural gas distribution, or real estate transactions.﻿﻿

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Instructions for Form 8903](https://www.irs.gov/pub/irs-pdf/i8903.pdf)," Pages 1, 3. Accessed Feb. 4, 2020. 
>     
> 2.  U.S. Government Publishing Office. "[26 U.S.C Section 199(a)](https://www.govinfo.gov/content/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleA-chap1-subchapB-partVI-sec199.pdf)," Page 816. Accessed Feb. 4, 2020.
>     
> 3.  Internal Revenue Service. "[Instructions for Form 8903](https://www.irs.gov/pub/irs-pdf/i8903.pdf)," Pages 1, 3-4. Accessed Feb. 4, 2020. 
>     
> 4.  Internal Revenue Service. "[Instructions for Form 8903](https://www.irs.gov/pub/irs-pdf/i8903.pdf)," Page 3. Accessed Feb. 4, 2020. 
>     
> 5.  Internal Revenue Service. "[Instructions for Form 8903](https://www.irs.gov/pub/irs-pdf/i8903.pdf)," Page 8. Accessed Feb. 4, 2020. 
>     
> 6.  U.S. House, Office of the Law Revision Counsel. "[26 USC 199: Repealed. Pub. L. 115-97, title I, §13305(a), Dec. 22, 2017, 131 Stat. 2126](https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section199&num=0&edition=prelim)." Accessed Feb. 4, 2020.
>     
> 7.  Internal Revenue Service. "[Instructions for Form 8903](https://www.irs.gov/pub/irs-pdf/i8903.pdf)," Pages 3-5. Accessed Feb. 4, 2020.
>     
> 8.  Internal Revenue Service. "[Instructions for Form 8903](https://www.irs.gov/pub/irs-pdf/i8903.pdf)," Pages 1-2, 4. Accessed Feb. 4, 2020.