This article is co-authored by Paul Ellis and Bob Yates who both lead our dedicated Real Estate Tax Consulting Group.

One of the most impactful additions in the One Big Beautiful Bill Act (OBBBA) was the permanent reinstatement of 100% bonus depreciation for a broad category of qualifying assets, including a new asset class known as Qualified Production Property (QPP). For manufacturers and industrial developers, QPP represents a powerful tax incentive—but one that requires careful planning and compliance with eligibility rules.

What Is Qualified Production Property?

QPP is a new category of depreciable nonresidential real property introduced under IRC §168(n) by the OBBBA. It includes buildings and structures used directly in manufacturing, production or refining activities. The intent of the provision is to incentivize domestic industrial development by providing 100% bonus depreciation of large capital investments in qualifying facilities.

This stands in contrast to traditional nonresidential real property, which is typically depreciated over 39 years under the Modified Accelerated Cost Recovery System (MACRS). With the QPP designation and proper timing, eligible buildings may be written off in full in the year they are placed in service.

Key Requirements for QPP Eligibility

To qualify for 100% bonus depreciation as QPP, the property must meet a specific set of criteria:

1. Qualified Production Activity 

The property must be used by the taxpayer as an integral part of a qualified production activity. This means the structure must directly support core operations such as manufacturing, processing or refining—not simply be adjacent to or supportive of those functions. The use must be essential to the production process itself, rather than administrative or ancillary. 

2. Original Use and U.S. Location

The original use of the property must begin with the taxpayer, and the property must be used within the U.S. or its territories. This means used buildings, acquisitions of previously placed-in-service facilities or imported structures do not qualify. The term "original use" means the first time the property is placed in service for any purpose, by any taxpayer. For QPP eligibility, the building must be new construction or newly developed by the taxpayer claiming the deduction. This includes buildings constructed by the taxpayer for their own use, or improvements made to previously undeveloped land. If a building has already been used, occupied or placed in service by another party—regardless of whether it was ever depreciated—it is not generally considered original use.

Additionally, property acquired from another party and merely renovated or repurposed does not meet the original use requirement. This includes scenarios where an existing building is refurbished and converted into a manufacturing or processing facility. In such cases, the structure itself would not qualify as QPP because its original use began with a prior taxpayer. However, certain qualifying improvements or additions made after acquisition may be eligible for 100% bonus depreciation under separate rules if they meet the criteria for new property placed in service by the taxpayer. 

3. Manufacturing or Production Use

The building must be used primarily for qualified production activities, such as:

• Manufacturing or assembly of tangible goods.
• Refining or chemical processing.
• Fabrication or extraction operations.

The law explicitly excludes areas used for office work, lodging, research and development, sales or general administration. To the extent those areas exist in the same facility, its square footage must be segregated and will not qualify for bonus treatment.

4. Construction Start Date

To prevent retroactive qualification, construction must begin after Jan.19, 2025, and before Jan. 1, 2029. Projects that were already underway before Jan. 19, 2025, are excluded, unless they fall below the 10% completion threshold for soft and hard costs.

5. Placed-in-Service Deadline

The QPP must be placed in service after July 4, 2025, and before Jan. 1, 2031. 

6. Timely Election on Tax Return

Taxpayers must make a formal election under IRC §168(n) on their return for the year the property is placed in service. Failure to make this election will result in default MACRS treatment.

Example: In 2026, a taxpayer purchases land and constructs a new manufacturing facility, placing it in service in 2028. The building consists of 80% dedicated manufacturing space and 20% administrative office space. Under the OBBBA, the portion of the building used directly in manufacturing qualifies as QPP and is eligible for 100% bonus depreciation. However, the office space does not qualify and must be depreciated under standard MACRS rules. Land and its improvements, such as parking lots and landscaping, are also excluded from QPP treatment, though some may qualify for bonus depreciation under separate provisions.

Limitations and Exclusions

QPP is subject to important exclusions such as:

• Leased property: Buildings leased to unrelated tenants do not qualify unless the lessee also meets the original-use requirement and uses the building for qualifying production.
• Related party transfers: Structures acquired from related parties are excluded, even if used for production.
• Dual-use facilities: If a portion of the property is used for non-production purposes (e.g., office space), that portion must be excluded from bonus depreciation calculations.

Recapture risk: If the property ceases to be used in production within 10 years of being placed in service, the IRS may require recapture of previously deducted depreciation.

Planning Considerations

Keep these tips in mind throughout every stage of development to maximize the benefits of QPP:

• Segregate functional space in architectural plans to clearly distinguish qualifying and non-qualifying areas.
• Document construction timelines and costs to establish compliance with the start-date and placed-in-service requirements.
• Review related party contracts to ensure transactions won’t taint eligibility.
• Coordinate tax elections with your CPA to ensure timely filing and reporting.

A cost segregation study can be useful in identifying and separating qualifying QPP components from non-qualifying areas and other structural elements.

Final Thoughts

QPP under the OBBBA offers an unprecedented opportunity for industrial developers and manufacturers to fully depreciate capital investment in the year placed in service. However, this incentive comes with strict eligibility requirements and technical nuances that must be carefully managed.

By understanding the key provisions of IRC §168(n) and working closely with tax pros throughout the planning and construction process, taxpayers can position themselves to take full advantage of this powerful new depreciation tool.