The One, Big, Beautiful Bill (OBBB) delivered on a campaign promise to incentivize manufacturing within the United States through the creation of a special deduction for investments in new manufacturing, production, and refining facilities. This rule, applicable to so-called qualified production property (QPP), provides for an immediate tax deduction of 100% of the qualifying investment. When fully eligible, QPP paired with 100% bonus depreciation and Section 179 expensing provides a pathway for immediate tax deductions with respect to a substantial portion of investments in new facilities and equipment. However, the QPP deduction isn’t without complications as a variety of specific requirements must be satisfied.
Where did the new qualified production property deduction come from?
The OBBB provided tax relief to businesses by permanently extending and expanding various business deductions. To incentivize investments in equipment and facilities, the OBBB permanently restored 100% bonus depreciation (was 40% in 2025) and increased the limitations on Section 179 expensing. However, the law went further and created a new category of 100% depreciation for QPP. This generally refers to nonresidential real property used in certain manufacturing, production, and refining activities. While bonus depreciation and Section 179 previously existed, the rules for QPP are new and require careful consideration, as outlined in greater detail below.
So, where did the new QPP deduction come from? There’s a long history of tax incentives being provided to those that make investments into favored types of real property and equipment. In that sense, QPP is an expansion of previously existing depreciation rules. However, two other factors influenced the creation of the QPP rules:
- Campaign promises. During the 2024 campaign, President Trump made several pledges regarding the expansion of manufacturing within the United States. One proposal was a 15% tax rate for businesses producing goods domestically while imposing tariffs on those that complete production overseas. The 15% tax rate didn’t materialize during the OBBB deliberations in Congress, but the QPP deduction is an indirect method of achieving the same result. Those investing in new manufacturing and production facilities in the United States will generate substantial, accelerated deductions that reduce their income tax burdens.
- The DPAD influence. There’s also precedent for a tax incentive related to domestic manufacturing in the form of the domestic production activities deduction (DPAD). That deduction was replaced by the Section 199A qualified business income deduction in 2018. However, traces of DPAD can be found within the QPP rules, especially when it comes to defining the qualifying use of such property.
The basics of the qualified production property deduction
There are four core elements to the 100% QPP deduction. Each of these elements are discussed in greater detail further below, but they can be summarized in the following manner:
- Ownership. To be eligible, the taxpayer that owns the QPP must also be the taxpayer engaging in the qualified production activity (see discussion below). The rules make this point explicit by stating that a lessor is ineligible for the QPP deduction. This requirement will conflict with many existing structures, so additional planning may be required.
- Property type. At its core, QPP is new nonresidential real property, which is placed in service in the United States, and which is used in a qualified production activity. However, the statute excludes any portion of such property that’s used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other unrelated functions. The focus of the QPP rules is on the construction of new property, but a limited relaxation of the original use requirement applies in the case of certain purchases of property. Importantly, the purchased property can’t have been used by anyone in a qualified production activity between Jan. 1, 2021, and May 12, 2025.
- Use of the property. The property must also be used by the taxpayer as an integral part of a qualified production activity (QPA). For this purpose, QPA means the manufacturing, production, or refining of a qualified product. However, the activities of any taxpayer don’t constitute manufacturing, production, or refining of a qualified product unless the activities of such taxpayer result in a substantial transformation of the property comprising the product. Notably, the taxpayer claiming QPP is also subject to an ongoing obligation to use the property in the QPA. Failure to use the property in that manner during the 10-year period after it’s placed in service will result in recapture of the prior depreciation.
- Timing. There are several important dates for the QPP deduction. The construction of new, eligible property must begin after Jan. 19, 2025, and before Jan. 1, 2029. The purchase of eligible used property must also occur within that time window. Eligible property must then be placed in service by the end of 2030.
Ownership planning considerations for the qualified production property deduction
Section 168(n) clarifies that the taxpayer claiming the QPP deduction must use the property in a QPA and that such taxpayer can’t be a lessor. By requiring simultaneous ownership of the property and operation of the QPA, these rules will put pressure on existing operational structures.
- Leasing revisited. Manufacturing businesses commonly utilize facility leasing arrangements both with unrelated and related parties. In the case of unrelated parties, such arrangements simplify balance sheets by removing real property, buildings, and associated long-term debt. Related party leasing arrangements typically achieve alternative tax and business planning objectives through real estate partnerships. Where leasing arrangements are utilized for new QPP, no party to such arrangement will obtain the tax benefit of accelerated depreciation under Section 168(n). Although other forms of tax depreciation would remain available to the lessor albeit over much slower recovery periods.
- No acquisition by lessee. The ownership requirement would naturally lead taxpayers that are currently leasing property to consider purchasing such property to claim the QPP deduction under the used property rule. However, Section 168(n) precludes such planning by disqualifying property if the taxpayer purchasing it has ever previously used such property (whether or not used in a QPA). That clarification acts as a form of anti-abuse rule preventing a lessor to lessee sale transaction to establish QPP eligibility.
- Financing considerations. The deduction’s potential value is impactful enough to drive new planning discussions, especially when alternative structuring is necessary. Assuming a $10 million investment in QPP and a 10% cost of capital, the net present value of the deduction for a corporate taxpayer at a 21% rate is roughly $1.5 million. And for taxpayers at a 37% marginal rate, the net present value for the same investment is roughly $2.5 million. Such immediate return on investment may be sufficient to outweigh any negative consequences of ownership of the facility by the business conducting the QPA.
- Open questions. Section 168(n) doesn’t elaborate on the extent to which the concept of the taxpayer may be broadened. Pending the publication of clarifying technical guidance, this is an area of caution. It would generally be expected that such concept would encompass property held by disregarded entities (such as single-member LLCs), where such property is consolidated with the QPA on a single tax return. That might naturally also apply to property held within a consolidated group of corporations. However, those points and any further extension of the ownership requirement require technical clarification.
Property considerations
The basics of the property qualification are relatively uncomplicated. The statutory text provides that QPP is:
- New property of which the original use begins with the taxpayer.
- Alternatively, property purchased by the taxpayer can qualify as long as it wasn’t previously used by anyone in a QPA between Jan. 1, 2021, and May 12, 2025).
- Placed in service in the United States or any possession of the United States.
- Used as an integral part of a QPA.
- Doesn’t include any such property that’s used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other unrelated functions.
From a planning perspective, the following actions will be important aspects of establishing eligibility for the 100% deduction:
- Documenting prior use. Construction of new QPP is the simplest path toward qualification. However, the used property acquisition rule will expand eligibility for taxpayers purchasing exiting facilities. The primary challenge with such transaction will be factual, with the purchaser bearing the burden of proof that no prior owner has used such property in a QPA during the requisite time period. That will require additional representations during the purchase as well as any further evidence to support the contractual language. Notably, this documentation exercise will be exacerbated in cases where multiple owners held the property during the look-back window.
- Cost segregation to remove disqualified portions. The purchase or construction of a new facility is commonly accompanied by a cost segregation study to allocate the cost basis among the various forms of property. Such studies allow for optimization of tax depreciation, which take on added significance with QPP. Clarifying guidance may be expected from the IRS regarding the manner of excluding portions of property related to offices and disqualified activities. But, irrespective of such guidance, cost segregation is an important step to documenting eligibility.
Property use considerations
A central requirement of QPP is that the property must be used by the taxpayer as an integral part of a QPA. This aspect of the rule is heavily definitional and is expected to pose the most significant factual and technical challenges.
Section 168(n) provides that a QPA includes manufacturing, production, or refining of a qualified product. Such activities don’t constitute manufacturing, production, or refining of a qualified product unless the activities of such taxpayer result in a substantial transformation of the property comprising the product. The term “production” is further defined to exclude all activities other than agricultural production and chemical production. In addition, the term “qualified product” means any tangible personal property if such property isn’t a food or beverage prepared in the same building as a retail establishment in which such property is sold. When evaluating qualification, the following points warrant further consideration.
- Integral part. The phrase “integral part” is used to describe the degree of required connection between the QPP and the QPA. However, the statute doesn’t elaborate on this term. Future regulations or other guidance will undoubtedly clarify this concept. Until that time, taxpayers would be advised to expect a high degree of connection between the property and the QPA.
- Substantial transformation of a qualified product. This concept of substantial transformation is crucial since it defines the amount of manufacturing, production, or refining effort required with respect to a qualified product. The insertion of the word “substantial” here signals a reasonably high bar to qualification. In that case, mere assembly, packaging, or similar activities might be insufficient. However, clarification of this concept is needed.
- Continued use in the QPA. There’s the possibility of a painful recapture event in the context of QPP. Namely, the rules require the taxpayer to continue using the property in the QPA for 10 years after it’s placed in service. Failure to use the property in such manner will trigger a Section 1245 recapture event that treats the property as if it were disposed of at the time it stopped being used as QPP. The recapture concept typically applies when depreciable property is sold, but the QPP rules add a heightened standard. Importantly, recapture may be triggered even if the property is used in some other productive fashion by the taxpayer that’s different from the QPA. Further clarification of this aspect of the rules will be important moving forward. Presumably, such recapture would extend to nonrecognition transfers, such as contributions under Section 351 or Section 721.
Putting it all together for the qualified production property deduction
The creation of another form of 100% depreciation for investments in new manufacturing and production facilities is welcome news for taxpayers considering expansion of their physical operations. The QPP deduction, paired with immediate deductions for equipment and other property, allows for accelerated returns, which offset the capital investment costs. However, establishing eligibility for QPP deductions requires consideration of complex rules that have not yet been defined. In that respect, taxpayers undertaking investments should carefully consider the statutory text and the interpretations that will likely follow.
Claiming the QPP deduction might not make sense in all cases. As discussed above, the ownership requirement may challenge preferred structures even when considering the net present value of deductions. Additionally, the continued use requirement may make some businesses wary about the potential for recapture if a production line may need to be shuttered in the future.
