Qualified Production Property Supercharges Cost Segregation Studies

Introduction

Manufacturers may be the biggest beneficiaries of the One, Big Beautiful Bill Act (OB3).

100% bonus depreciation for tangible personal property allows manufacturers to immediately deduct the full cost of equipment and machinery, encouraging companies to reinvest in their operations and upgrade their technologies. This is a significant win, especially for small and mid-sized operations who rely on predictable cash flow.

But the OB3 didn’t stop there.

The current administration has made domestic manufacturing a priority, initially hoping to reduce the corporate tax rate to 15% for companies that manufacture products domestically.

That idea was translated into a new incentive called Qualified Production Property (QPP). Through TY 2029, in addition to writing off tangible personal property, taxpayers will be able to fully expense parts of the facility shell where manufacturing actively occurs. For the first time, base building assets – and in certain cases, the entire building – may qualify for bonus depreciation.

Broadening the scope of eligible assets has insiders expecting a wave of industrial development, with particular construction activity in the automotive, food production, and semiconductor industries.

National Association of Manufacturers President and CEO Jay Timmons applauded the creation of QPP, stating that the provision “…brings us closer to the vision of a 15% effective tax rate for manufacturers.” 

Defining QPP

Section 168 (n) establishes QPP as any portion of U.S. non-residential real property used by the taxpayer in a “qualified production activity.”

A “qualified production activity” involves doing one or more of the following to a “qualified product”:

• Manufacturing
• Producing (limited to agricultural and/or chemical production)
• Refining

The qualified product may be any type of tangible personal property that is substantially transformed by the qualified production activity – with one exception. If the tangible personal property is a food/beverage prepared in a facility that also has a retail outlet for selling that food/beverage, the food/beverage is not considered a qualified product, and the associated assets cannot be considered QPP.

To be considered QPP, the property must be owner-occupied.

• You own a property and lease it to an unrelated third party: If the tenant is the one performing the production activity, the property is not eligible for QPP.
• You own a property and lease it to your operating company: The property is not eligible for QPP.

Further exclusions:

• Only portions of the property directly related to manufacturing are eligible. Spaces for the following “support functions” cannot qualify as QPP:

• Office space
• Sales or customer service centers
• Software engineering or data centers

• Parking areas
• Storage areas
• If the property is being depreciated using the Alternative Depreciation System (ADS), it cannot qualify as QPP.

100% Bonus on QPP: It’s About Timing

QPP in newly constructed facilities and acquisitions can both qualify for 100% bonus if the timing is right:

Keep in mind that in order to qualify for that 100% bonus, an election must be made by the taxpayer to treat appropriate assets as QPP.

Since 100% bonus on QPP is temporary, we anticipate seeing many projects shift from “sometime” to “shovel-ready” in the near future.

Recapture

QPP is real property in substance, but is treated like Sec. 1245 property when it comes to recapture:

Generally, non-residential real property (Sec. 1250) is subject to capital gains recapture. However, QPP is only subject to ordinary income recapture upon sale.

Recapture can also be triggered by a change in use within ten years after the QPP was placed-in-service. If the property is repurposed and “qualified production activity” has ceased, ordinary income recapture rules will apply.

Taking Action

Cost Segregation Studies on manufacturing facilities will be more powerful than ever before.

The establishment of QPP – and its eligibility for 100% bonus – will supercharge studies and provide a tremendous shot in the arm to domestic manufacturing. Businesses planning to expand plants or upgrade infrastructure have been granted a boon that may significantly offset the upfront costs of capital projects.

However, it’s crucial to remember that while 100% bonus depreciation on tangible personal property and land improvements has been made permanent by the OB3, 100% bonus on QPP is in effect for a limited time only.

Key steps to take now:

• Review potentially eligible projects, timing strategies, and potential exclusions
• Revisit capital investment plans to ensure optimal use of permanent 100% bonus depreciation, expanded Section 179d expensing, and the new QPP election
• Evaluate construction timelines to ensure new facilities meet OB3 deadlines
• Model tax impacts of electing 100% vs. reduced bonus depreciation (40%) to align with broader financial goals
• Work with a cost segregation provider to isolate qualifying production areas from non-production areas, assuring compliance while maximizing benefit

This last bullet is crucial — most facilities will have some level of mixed-use activity, and taxpayers will need to partner with a qualified cost segregation engineer well-versed in manufacturing technology.

Your manufacturing clients shouldn’t wait – 100% bonus on QPP isn’t forever, and the election should be made on a timely filed return. Now’s the time to consider Cost Segregation.