Qualified Production Activities Income (QPAI)

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Qualified Production Activities Income (QPAI)

Qualified Production Activities Income (QPAI) is the portion of a U.S. taxpayer’s income that is attributable to domestic manufacturing and production activities. It was the basis for the domestic production activities deduction (DPAD) under former Internal Revenue Code Section 199.

How QPAI is calculated

  • Domestic production gross receipts (DPGR): gross receipts from the manufacture, production, growth, or extraction of qualifying production property in the U.S.
  • QPAI = DPGR − allocable cost of goods sold − other expenses, losses, or deductions properly allocable to those receipts.
  • For businesses with multiple lines of activity, income and expenses must be allocated to determine QPAI attributable to each line.

Domestic Production Activities Deduction (DPAD) — historical overview

  • DPAD provided a tax deduction for qualifying domestic production income and was generally limited to 9% of QPAI.
  • Additional limits included:
  • A wage-based limit: DPAD could not exceed 50% of the taxpayer’s W‑2 wages for the relevant calendar year. Employers with no W‑2 wages (or no wages allocated via Schedule K‑1) could not claim the deduction.
  • An oil-related reduction: for oil-related QPAI, reduce the DPAD by 3% of the smallest of (a) oil-related QPAI, (b) total QPAI, or (c) adjusted gross income (individuals/estates/trusts) or taxable income (other taxpayers), each computed without the DPAD.
  • Historically, taxpayers used IRS Form 8903 to compute allowable QPAI and the DPAD.

Important status note: Section 199 and the DPAD were repealed and the deduction expired on December 31, 2017. Businesses should check current law or consult a tax advisor for any post‑2017 rules or related incentives.

Activities that qualified (under former IRC §199)

Qualifying production activities included, among others:
– Manufacturing conducted in the U.S.
– Selling, leasing, or licensing motion pictures that were at least 50% produced in the U.S.
– U.S. construction projects (including building and renovation)
– Engineering and architectural services connected to a U.S. construction project
– Software development in the U.S., including video game development

Major exclusions

QPAI did not include income from:
– Restaurant services
– Distribution of electricity or natural gas
– Real estate transactions

Key takeaways

  • QPAI measured U.S.-based production income by subtracting allocable costs and deductions from DPGR.
  • The DPAD lowered tax liability for qualifying production income but was subject to percentage and wage limits and special reductions for oil-related income.
  • The DPAD expired at the end of 2017; QPAI/DPAD rules are no longer available in their former form. Consult a tax professional for current incentives and applicable rules.