Learn how to use QPP along with bonus depreciation to enhance tax savings from your manufacturing facility investments.
U.S. manufacturers received a major boost in the One Big Beautiful Bill Act (OBBBA) with the creation of Qualified Production Property (QPP). This new incentive allows a 100% deduction for the cost of real property used in manufacturing activities.
While full expensing of assets is not new to the tax code, it generally applies only to tangible personal property like machinery and other assets with short tax lives. However, items of real property (i.e., a building’s structural components such as walls, roofs, and lighting) are generally not eligible for full expensing and have a lengthy depreciation period of 39 years.
The opportunity to fully deduct real property is significant — and when coupled with the permanent extension of 100% bonus depreciation — it can result in the immediate write-off of all manufacturing-related assets in a facility.
What is Qualified Production Property?
Qualified production activities and assets
QPP is defined as nonresidential real property used as an integral part of a qualified production activity. Production activities generally include:
- Manufacturing tangible personal property
- Chemical production
- Agricultural production
- Refining operations
Only a facility’s production-related areas can qualify. Areas dedicated to offices, administrative functions, lodging, research activities, and warehousing are excluded.
Since QPP relates to the real property within a facility, items otherwise classified as personal property (equipment or infrastructure solely used for equipment) wouldn’t meet this definition but would likely otherwise qualify for 100% bonus depreciation.
Items specifically eligible for QPP treatment could include the following within 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; however, not all production activities qualify. Treasury is expected to issue guidance further defining qualified production activities. A starting point for any organization seeking to make a QPP election is determining whether specific activities fall within the purview of the QPP rules and documenting such conclusion.
Original use and applicable dates
The original use of the property generally must commence with the taxpayer for QPP purposes. There are special rules for acquiring property previously used in manufacturing that may warrant additional analysis. If renovations occur after an acquisition, those renovations should be eligible for QPP treatment.
Two dates are important for QPP eligibility: construction start date and 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 2, 2025 and before January 1, 2031.
CLA insight: Construction start and placed in service dates can pose challenges to establish under IRS guidance and require an evaluation of construction contracts, payment applications, and building certificates. A thorough analysis to determine qualifying dates for QPP is essential.
Qualified Production Property recapture rules
Under a recapture provision, if QPP ceases to be used for a qualified purpose at any time during the 10-year period beginning on the asset’s placed-in-service date, a portion of the depreciation previously claimed on the QPP is disallowed and must be added back into income.
CLA insight: Proper planning for QPP includes weighing the potential for the qualifying space to be converted to a non-qualified use during the 10-year recapture period and modeling the impacts of such a recapture event.
Making the QPP election
QPP is an election that must be made on a timely filed return in the year the property is placed-in-service and such election can only be revoked with consent from Treasury, which will only be granted in “extraordinary circumstances.”
CLA insight: While many manufacturers will view the QPP election as an easy decision, all factors must be considered. Other items on an organization’s tax return may counsel against making a QPP election altogether, or making it with respect to only certain assets. For example, net operating losses or tax credit carryforwards may diminish QPP election benefits and must be closely evaluated.
Qualified Production Property ownership considerations
Taxpayers operating manufacturing trades or businesses would be eligible to claim the QPP election on property owned directly by such trade or business. However, current QPP rules indicate leased property would not be eligible. Further definition is not provided within the statute as to what would constitute a lease.
CLA insight: The ownership provision may catch organizations off guard and inadvertently disqualify otherwise eligible property from QPP. Real estate ownership often involves an LLC created to own building assets that files its tax return separately from the operating company. Without further guidance, this self-rental structure may make the real estate entity ineligible for the QPP election.
Leveraging cost segregation for QPP
A cost segregation study is an engineering-based analysis splitting building components into different asset classes for tax purposes. It identifies portions of a property that can be depreciated over shorter recovery periods (e.g., 5, 7, or 15 years) instead of the standard 39-year period for commercial buildings.
A cost segregation study should be conducted to isolate the items of personal property not eligible for a QPP definition (but would most likely be eligible for bonus depreciation). The remaining assets within a qualified area could then be further analyzed for QPP eligibility (e.g., roofing, walls, and lighting).
Qualified Production Property example
ABC Company, a widget manufacturer, is looking to expand its production space. It currently holds its facility within ABC HoldCo (a separate LLC) and is considering purchasing an existing warehouse next door or building an expansion on the vacant land adjacent to the existing facility. The warehouse is at record low pricing and could be an excellent investment.
The warehouse hasn’t been used for manufacturing. It would need substantial work and would most likely have areas for expanded office personnel, a research lab, and shipping/packaging space. If ABC were to build on the vacant lot, the land isn’t large enough to accommodate all functions and would instead be completely dedicated to widget production.
QPP considerations
Which entity can hold the new space to be eligible for QPP?
Based on the current lack of guidance and a plain reading of the statute, it appears only the operating entity (ABC Company) could hold the assets and take advantage of QPP. Without further guidance from the IRS, ABC Holdco would not be permitted to be the owner of these areas and claim QPP.
What improvements would be eligible for QPP?
Under the purchase option, the production areas (excluding the office, research, and shipping/packaging areas) could be treated as QPP once the items of tangible property have been segregated. Under the expansion option, the entirety of the space could be eligible for QPP treatment once the items of tangible property have been segregated.
How CLA can help manufacturers with Qualified Production Property savings
CLA’s cost segregation practice helps clients across multiple industries capture tax savings from their real estate investments. Leveraging our firm’s deep experience working with manufacturers, our team of CPAs, engineers, and construction professionals can help your organization identify, capture, and document your QPP and fixed asset benefits.