Qualified Production Activities Income (QPAI) is a tax incentive introduced by the United States government to encourage businesses to manufacture, produce, grow, or extract (MPGE) products within the United States. This incentive allows manufacturers to claim a 9% tax deduction on the qualified production activities income (QPAI) derived from domestic activities. This incentive was first introduced by the American Taxpayer Relief Act of 2012 and has been extended as recently as 2018.

QPAI is a term used to describe any income derived from activities that are eligible for a 9% tax deduction under section 199 of the U.S. Tax Code. To qualify for the deduction, certain types of activities must be conducted within the United States, such as manufacturing, growing, producing and/or extracting (MPGE) of tangible property, digital products, computer software, films, recordings, and pharmaceuticals. The deduction is also extended to qualified agricultural and horticultural cooperatives.

In order to qualify for the QPAI tax incentive, a business must meet specific requirements. These requirements include generating at least 50% of the business’s total income from activities that are eligible for deduction under section 199 and meeting the “domestic production gross receipts” test. A “domestic production gross receipts” (DPGR) test is conducted by the Internal Revenue Service (IRS) to determine the domestic source of qualified production income. The DPGR test states that businesses must derive at least 50% of its total income from activities that are within the United States, Puerto Rico or a U.S. possession.

The tax deduction associated with QPAI can reduce the amount of taxes businesses owe to the IRS each year. Businesses that take advantage of this incentive can lower their overall effective corporate tax rate. This tax incentive is especially beneficial for small businesses, as they tend to have a higher effective tax rate. Additionally, the United States government offers a credit for domestic research and development activities, which can further reduce the amount of taxes owed on domestic production income.

QPAI has become an increasingly popular incentive for businesses operating in the United States. This tax incentive has helped to stimulate the economy by encouraging businesses to invest in domestic production and providing greater financial incentive for businesses to stay within the United States. Additionally, this incentive has helped businesses to reduce their effective tax rate and allowed taxpayers to benefit from the financial savings associated with the QPAI deduction.