The One Big Beautiful Bill Act (OBBBA) introduced a powerful new tax incentive: 100% first-year depreciation for qualified production property (QPP). This deduction applies to certain nonresidential real estate and differs from traditional bonus depreciation, which applies only to assets with shorter recovery periods. Normally, commercial buildings must be depreciated over 39 years—making this new option significantly more valuable.
What Counts as Qualified Production Property (QPP)?
The statutory rules for QPP are technical, but the concept can be summarized clearly.
Definition Overview
A property qualifies as QPP when it meets the following criteria:
- It is part of nonresidential real estate used by your business as an integral component of a qualified production activity.
- A qualified production activity includes manufacturing, producing, or refining a qualified product.
- A qualified product is tangible personal property — excluding food or beverages prepared inside the same building where they are sold.
- (For example: restaurants cannot classify their buildings as QPP.)
- The activity must result in a substantial transformation of the underlying materials.
In Simple Terms
Most QPP will consist of factory or production buildings, though additional restrictions apply.
Placed-in-Service Requirements
For a building to qualify for the 100% first-year deduction, it must meet strict timing rules.
For Newly Constructed Property
Construction must:
- Begin after January 19, 2025, and before 2029
- Be placed in service in the U.S. or a U.S. possession before 2031
- Have original use begin with the taxpayer
Exception for Previously Used Buildings
A used nonresidential building may also qualify if it meets all of the following:
- Acquired after January 19, 2025, and before 2029
- Not used for a qualified production activity from January 1, 2021, to May 12, 2025
- Not previously used by the taxpayer
- 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, the IRS may extend the placed-in-service deadline when an Act of God prevents timely completion.
Potential Pitfalls and Limitations
While this deduction can be extremely valuable, several rules can disqualify a property.
Leased Buildings
If the taxpayer leases out the building—even if the tenant performs qualified production—the building cannot be treated as QPP.
Nonqualifying Activities
Any portion of a building used for non-manufacturing purposes cannot be treated as QPP. This includes:
- Office or administrative space
- Lodging or break areas
- Parking
- Sales functions
- Research or development
- Software development
- Engineering services
Only areas directly tied to manufacturing, production, or refining activities qualify.
Ordinary Income Recapture
If the building stops being used for a qualified production activity within 10 years, the IRS will apply ordinary income recapture on the depreciation previously taken.
Expect Further IRS Guidance
The QPP deduction offers a substantial tax advantage for manufacturers and businesses involved in production activities. However, applying the rules can be complex — especially when allocating costs to mixed-use areas or determining which activities qualify.
Once an election is made, it cannot be revoked without IRS approval. Further IRS guidance is expected to clarify several gray areas.
If you have questions about eligibility, cost allocation, or strategic planning, contact us for the latest updates and professional assistance.