The One Big Beautiful Bill Act (OBBBA) introduces a powerful new tax incentive for manufacturers and similar businesses. Under this legislation, companies can claim 100% first-year depreciation on nonresidential real estate classified as Qualified Production Property (QPP)—a significant departure from the standard 39-year depreciation schedule.
🔍 What Is Qualified Production Property (QPP)?
Understanding QPP requires navigating a few key definitions:
- QPP refers to the portion of nonresidential real estate used directly in a qualified production activity.
- A qualified production activity includes the manufacturing, production, or refining of a qualified product.
- A qualified product is any tangible personal property excluding food or beverages prepared and sold in the same building (e.g., restaurants do not qualify).
- The activity must result in a substantial transformation of the property involved.
👉 In simpler terms, QPP generally applies to factory buildings, but eligibility depends on specific use and transformation criteria.
🛠️ Placed-in-Service Requirements
To qualify for the 100% depreciation:
- Construction must begin after January 19, 2025, and before 2029.
- The property must be placed in service in the U.S. or a U.S. possession before 2031.
- The original use of the property must begin with the taxpayer.
🏢 Exception for Previously Used Buildings
A previously used building may still qualify if:
- Acquired between January 19, 2025, and 2029
- Not used in a qualified production activity between January 1, 2021, and May 12, 2025
- Not previously used by the taxpayer
- Used as an integral part of a qualified production activity
- Placed in service before 2031
⚠️ The IRS may extend the deadline if an Act of God prevents timely placement in service.
⚠️ Common Pitfalls to Avoid
While the QPP deduction is generous, it comes with important caveats:
🚫 Leased-Out Buildings
Only buildings used directly by the taxpayer for qualified production activities qualify. If leased to another party—even for qualifying use—the deduction is not allowed.
🚫 Nonqualified Activities
Areas used for the following do not qualify:
- Offices or administrative services
- Lodging or parking
- Sales or research activities
- Software development or engineering
🔁 Depreciation Recapture Risk
If the property ceases to be used for a qualified production activity within 10 years, an ordinary income recapture rule applies.
📌 IRS Guidance and Final Thoughts
This new deduction offers substantial tax savings, but implementation may be complex. Businesses must carefully:
- Identify qualifying portions of buildings
- Allocate costs appropriately
- Understand that once elected, the deduction cannot be revoked without IRS approval
📞 Contact your tax advisor to explore eligibility and stay updated as IRS guidance is expected.