Learn how Qualified Production Property (QPP) and bonus depreciation can accelerate deductions for manufacturing facility investments.
If you’re investing in a new plant, expanding a production line, or modernizing an existing facility, Qualified Production Property (QPP) can materially change the way you model the project.
Created by the One Big Beautiful Bill Act (OBBBA), QPP allows a 100% deduction for certain production-related real property costs in the year the property is placed in service. IRS Notice 2026-16 provides interim guidance for manufacturers as they scope space, document qualifying activity, and plan for recapture exposure.
Full expensing isn’t new to the tax code. But historically it’s applied mainly to tangible personal property (think machinery and equipment), not the building itself.
Real property — a building’s structural components like walls, roofs, lighting, and HVAC — typically depreciates over 39 years. QPP is different: it can allow immediate recovery of qualifying production-related real property expenditures.
And when you pair QPP with 100% bonus depreciation for eligible personal property, a facility project may generate a much larger first-year deduction than most manufacturers are used to seeing.
Why QPP changes the depreciation timeline
Manufacturing facilities have traditionally been depreciated over 39 years, which means tax recovery often lags far behind the cash you’ve invested. QPP shortens that timeline by allowing immediate expensing for certain production-related real estate — improving near-term liquidity and potentially freeing cash for reinvestment.
One important nuance: Eligibility depends on how space is used, not how it’s labeled on a floor plan. That’s why scoping and documentation matter from day one.
What is Qualified Production Property?
Qualified Production Property (QPP) is generally nonresidential real property used as an integral part of a qualified production activity.
In addition, the property must be in the United States or a U.S. territory, not be subject to the Alternative Depreciation System (ADS), and be properly designated through a timely election.
Qualified production activities
Production activities generally include:
- Manufacturing tangible personal property
- Chemical production
- Agricultural production
- Refining operations
A key requirement is substantial transformation — the activity must materially convert raw materials or inputs into a final, distinct product. Activities such as packaging, labeling, or minor assembly don’t qualify. Ownership of the final product will not be used as a consideration for the purposes of determining QPA eligibility.
Only a facility’s production-related areas can qualify. Areas dedicated to offices, administrative functions, lodging, and research activities are excluded — and finished-goods storage is explicitly excluded. Some supporting functions (like raw-material receiving, storage, and preparation) may be included when they’re essential to completing the production process.
Examples of building components that may qualify (in eligible production areas)
- Structural walls
- General lighting
- General building HVAC
- General building plumbing lines
- Insulation
- Roofing
CLA insight: The list of qualified production activities is broad, but not every activity qualifies. A strong starting point is confirming the activity meets the substantial transformation standard and documenting your conclusion.
Timing and original use requirements
For QPP purposes, original use of the property generally must commence with the taxpayer. Special rules may apply when acquiring property previously used in manufacturing (the property can’t have been used in any QPA between January 1, 2021 and May 12, 2025), and renovations after acquisition may be eligible for QPP treatment.
Two dates are important for QPP eligibility: The construction start date (acquisition date) and the placed-in-service date. QPP construction must begin after January 19, 2025 and before January 1, 2029, and the QPP must be placed in service after July 4, 2025 and before January 1, 2031.
CLA insight: Construction start and placed-in-service dates can be challenging to substantiate. Evaluating contracts, payment applications, building certificates, and retaining support is essential. Careful consideration of your overall tax accounting method is also necessary.
QPP isn’t limited to new construction. Capitalized upgrades — such as electrical and mechanical system improvements or other production-supporting modernization work — may qualify when they are an integral part of qualifying production activities.
Qualified Production Property planning opportunities for manufacturers
Flexible elections (including partial elections)
You’re not required to designate every eligible asset as QPP. Partial elections can help align deductions with taxable income, avoid over acceleration, and manage future recapture exposure tied to changes in how a facility is used.
The 95% de minimis rule
When at least 95% of a facility is used in qualified production activities, you may be able to treat 100% of the building as QPP, even if a small amount of office or administrative space exists. For some plants, this rule can expand the qualifying basis with minimal added complexity.
Integrated facilities
Multiple buildings operating together on contiguous land may be treated as a single integrated facility. This approach can extend QPP treatment to structures directly supporting production — such as raw-material storage — when they function as part of a unified production operation.
Recapture and risk management
QPP includes a 10-year recapture period. If QPP ceases to be used for a qualified purpose at any time during the 10 years beginning on the asset’s placed-in-service date, the portion of the QPP property — that underwent a change of use —will be disqualified property and subject to recapture. That entire portion of QPP depreciation previously claimed will be disallowed and treated as ordinary income.
Partial changes in use can result in partial recapture, while temporary shutdowns or conversions to different qualifying production activities generally don’t trigger recapture. As a result, QPP elections should be made in the context of long-term operational plans, not solely current-year tax savings.
CLA insight: Possible planning includes modeling the impact if qualifying space is converted to a non-qualifying use during the 10-year period.
Potential IRS audits
From an audit perspective, expected focus areas include:
- Whether space truly functions as an integral part of production,
- Whether activities rise to the level of substantial transformation, and
- Whether basis allocation methods are reasonable and well documented.
Strong support — such as engineering studies, floor plans, process-flow documentation, and consistent methodologies — can improve defensibility.
Making the QPP election (and ownership considerations)
QPP is an election made on a timely filed return in the year the property is placed in service. Once made, it can generally be revoked only with Treasury consent in extraordinary circumstances.
Because elections can be tailored (including partial elections), it’s worth coordinating the decision with your broader tax profile. For example, net operating losses or credit carryforwards can affect the value of immediate expensing.
Related-party leases
The most eagerly anticipated portion of the guidance addresses related-party leasing arrangements. Under the statute, a lessee’s activities cannot be considered a qualifying production activity (QPA) of the lessor. The interim guidance provides a taxpayer-favorable exception to this rule for certain leases between related parties:
- Members of a consolidated group, and
- Commonly controlled pass-through entities – lessee and lessor (either an individual or a pass-through entity) are both 50% or more owned by the same persons, directly or by attribution under §267(b) or §707(b).
In these situations, the related-party lease is disregarded, and the lessor’s QPP is determined based on the QPA conducted by the related-party lessee.
Leveraging cost segregation for QPP
A cost segregation study is an engineering-based analysis splitting building components into different asset classes for tax purposes, identifying portions that can be depreciated over shorter lives (e.g., 5, 7, or 15 years) instead of 39 years.
QPP doesn’t eliminate the need for cost segregation — it increases the importance of getting basis allocation right. For mixed-use facilities, partial elections, or future changes in operations, cost segregation helps align tax treatment with how space is used.
In practice, cost segregation can help isolate personal property not meeting the QPP definition (but may still qualify for bonus depreciation), while supporting the basis assigned to production-related real property.
Qualified Production Property example
ABC Company, a widget manufacturer, wants to expand its production space. It currently holds its facility in a separate real estate entity and is considering purchasing an adjacent warehouse to expand its current manufacturing operations.
The warehouse has not been used for manufacturing and would need substantial work. ABC would dedicate this new space to widget production.
As ABC evaluates options, it should consider not only which areas are production-related, but also whether supporting buildings (such as raw-material handling) function as part of an integrated facility, and how much potential non-qualifying space (like offices or finished-goods storage) impacts the amount eligible for QPP.
QPP considerations
Which entity can hold the new space to be eligible for QPP?
Ownership structures may affect eligibility. Care will need to be taken to ensure that the leasing arrangements meets one of the above related-party lease exceptions. Assuming they meet a related-party exception, either ABC or related real estate entity can own the new space.
What improvements would be eligible for QPP?
Eligible property includes the production areas that meet the definition of qualified production property that results in a substantial transformation of property. ABC would benefit from first identifying tangible personal property that should be appropriately segregated and verifying basis is properly allocated.
Should ABC make a full or partial election?
If ABC is concerned about potential changes in facility use over the next decade, a measured, partial election may reduce future recapture exposure while still delivering meaningful cash-flow benefits.
How CLA can help manufacturers with Qualified Production Property savings
CLA’s cost segregation practice helps clients capture tax savings from real estate investments. Our team of CPAs and industry professionals can help identify, document, and support QPP positions and related fixed-asset benefits.
We can help you:
- Identify qualifying production property,
- Model election strategies,
- Prepare audit-ready documentation, and
- Coordinate QPP with cost segregation and other depreciation incentives.