Manufacturers and production-based businesses may soon benefit from a powerful new tax deduction thanks to the upcoming provisions of the One Big Beautiful Bill Act (OBBBA). This legislation introduces a unique opportunity—allowing **100% first-year depreciation** for nonresidential buildings that qualify as Qualified Production Property (QPP). This is a significant shift from traditional depreciation methods, where buildings must typically be depreciated over 39 years.
Unlike the standard bonus depreciation available for tangible property with a recovery period of 20 years or less, or qualified improvement property with a 15-year recovery period, QPP applies specifically to nonresidential real estate used in production-based activities. If used correctly, this deduction could provide major tax savings for eligible businesses.
What Is Qualified Production Property (QPP)?
The IRS definition of QPP can be complex, but it can be summarized as follows:
- QPP refers to the portion of a nonresidential building that is used by a taxpayer as an integral part of a qualified production activity.
- A qualified production activity includes manufacturing, producing, or refining a qualified product.
- A qualified product is any tangible personal property—excluding food or beverages prepared and sold in the same building (meaning restaurants do not qualify).
- The activity must result in a substantial transformation of the property being produced.
In simpler terms, QPP generally refers to buildings such as factories and production facilities. However, only the areas directly related to eligible production activities qualify; additional limitations apply.
Eligibility & Placed-in-Service Rules
To qualify for the 100% first-year deduction, QPP must meet specific construction and placed-in-service requirements:
- 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 generally begin with the taxpayer.
Exception for Previously Owned Property
A previously used nonresidential building may still qualify if it meets all of the following conditions:
- Acquired after January 19, 2025, and before 2029.
- Not used in a qualified production activity between January 1, 2021, and May 12, 2025.
- Never previously used by the taxpayer.
- Now used as an integral part of a qualified production activity.
- Placed in service in the U.S. or a U.S. possession before 2031.
Additionally, if an Act of God (as defined by the IRS) prevents timely completion, the IRS may extend the deadline for placing the property in service.
Important Pitfalls to Watch Out For
While the QPP deduction can be highly valuable, there are several limitations that taxpayers should keep in mind:
1. Leased Property
If you own a building and lease it to another party—even if the tenant uses it for a qualifying production activity—you generally cannot treat it as QPP.
2. Nonqualified Areas of a Building
The deduction only applies to the areas used directly for eligible production activities. The following spaces are not considered QPP:
- Offices or administrative areas
- Sales departments
- Lodging or parking areas
- Research or engineering spaces
- Software development zones
- Any activity not tied to transforming tangible personal property
3. Ordinary Income Recapture
If the property stops being used for a qualified production activity within 10 years of being placed in service, an ordinary income depreciation recapture rule will apply—potentially resulting in unexpected tax liability.
What to Expect Next
Further clarification from the IRS is anticipated regarding implementation, allocation of costs within buildings, and qualification standards. Once the deduction is elected, it typically cannot be revoked without IRS approval, so strategic planning is essential.
Manufacturers, production companies, and industrial businesses should start reviewing their facilities and future expansion plans now to assess QPP eligibility.
Need Guidance? Botwinick Can Help
Determining QPP eligibility requires careful analysis of building usage and cost allocation. Our team at Botwinick & Co. specializes in helping businesses maximize tax benefits while staying fully compliant with evolving regulations.
Contact us today to review your facility and develop a strategy that aligns with the new QPP deduction and other available tax-saving opportunities.
