US 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 qualified manufacturing activities.

While full expensing of assets is not new, it generally has applied 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 manufacturing-related assets in a facility.

What is Qualified Production Property?

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.

Items specifically eligible for QPP treatment could include the following within eligible production areas:

• structural walls
• lighting
• HVAC
• plumbing lines
• insulation
• roofing.

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 before January 1, 2031.

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 isn’t eligible, including property leased to a related party.

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 example FAQs

• Which entity can hold the new space to be eligible for QPP?

Based on the current lack of guidance and the 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 wouldn’t 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 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.

Michael DePrima leads CliftonLarsonAllen’s federal tax strategies group.