Qualified Production Activities Income (QPAI)
What It Is:
Qualified production activities income (QPAI) is certain income related to manufacturing that qualifies to be taxed at a lower rate.
How It Works/Example:
For example, let's assume that Company XYZ generated $10,000,000 in widget sales last year. It has a factory in Nebraska. The cost of producing the widgets in Nebraska was $7,000,000, meaning that it made a profit of $3,000,000.
Normally, Company XYZ would be subject to, say, a 35% tax on the $3,000,000 profit. But because Company XYZ produced the widgets in the United States, Company XYZ has qualified production activities income and can exclude 9% of the $3,000,000 profit from taxation. Thus, Company XYZ is taxed on $2,730,000 rather than the full $3,000,000. This saves Company XYZ $94,500.
Individuals, corporations, cooperatives, estates, and trusts use IRS Form 8903 to figure their allowable qualified production activities income. The activity must be attributable to a trade or business.
Why It Matters:
The tax-deductibility of qualified production activities income is intended to encourage manufacturers to produce goods in the United States. The deduction came into existence as part of the American Job Creations Act in 2004. The deduction is limited to 50% of the W-2 wages paid by the taxpayer during the calendar year that ends with (or within) the taxpayer's taxable year.
The deduction exists at the federal level, but it can also exist at the state level (depending on the state). If a company does not have qualified production activities income, it generally does not qualify for a domestic production activities tax deduction from the IRS. Restaurants or any kind of food and beverages prepared at a retail establishment generally do not qualify.