A new federal tax incentive could let manufacturers deduct up to 100% of the cost of a new production facility in a single year.
The Qualified Production Property (QPP) provisions under Internal Revenue Code Section 168(n) allow eligible manufacturers and producers to elect an immediate deduction for up to 100% of the adjusted basis of qualifying production real estate – property that otherwise is often depreciated over 39 years.
What Qualifies as Production Property Under QPP
QPP generally applies to nonresidential real property located in the U.S. or a U.S. territory and used by the taxpayer as an integral part of a qualified production activity, including manufacturing, chemical production, agricultural production and refining. The activity must substantially transform materials or components into a distinct product. Packaging or minor assembly alone generally does not qualify, while areas used for raw material receiving and storage may qualify; finished goods storage, distribution and retail sales space generally do not.
Qualifying building areas may include manufacturing and assembly floors and certain integral support areas. Production machinery is evaluated separately under other depreciation rules. Corporate offices, administrative and sales space, R&D space, parking and other areas unrelated to the qualified activity generally do not qualify. Current IRS guidance also provides a favorable rule for facilities with at least 95% qualifying physical space.
Timing matters. Construction must generally begin after January 19, 2025, and before January 1, 2029, and the property must generally be placed in service after July 4, 2025, and before January 1, 2031. The taxpayer generally must conduct the qualifying activity, and property required to use the alternative depreciation system does not qualify. Because the rules include specific election and recapture requirements, manufacturers should evaluate eligibility and the facility’s expected long-term use before claiming the deduction.
A quick example: a manufacturer builds a $20 million facility ($15 million reasonably allocated to qualifying production space and $5 million to office space). If all requirements are met and the taxpayer elects QPP treatment, it may deduct the qualifying $15 million basis in the year the facility is placed in service while depreciating the office portion normally.
Our Thoughts: Planning for the QPP Deduction
This is one of the most significant federal tax incentives available to manufacturers in decades, and it changes the math on capital projects. For companies planning new plants, production expansions, reshoring efforts or qualifying acquisitions, immediately expensing qualifying manufacturing real estate can meaningfully improve project economics, first-year cash flow and overall return on investment.
The benefit is not limited to greenfield construction. Qualifying expansions and improvements to existing facilities may also be eligible. Certain acquired properties can qualify under a narrow exception, but an operating manufacturing plant acquisition generally will not, which means careful analysis is essential.
The catch is precision. Because the deduction depends on separating eligible basis from nonqualifying space and other property, documentation and reasonable cost allocation drive the outcome. Square footage, architectural or engineering plans, construction invoices and cost segregation data may all support the analysis. A cost segregation study can also separately identify shorter-life equipment and components that may qualify for accelerated depreciation under other rules.
Our strongest recommendation involves timing. Manufacturers should evaluate QPP during the planning stage of a capital project, not after construction is complete. Decisions about facility layout, space designation and project documentation are far easier to get right upfront than to reconstruct later.
The Schneider Downs team is actively assisting clients in assessing eligibility, modeling potential tax benefits, coordinating cost segregation studies and evaluating how QPP interacts with other federal and state tax provisions.
If your organization is considering a new manufacturing facility, expansion, improvement or potential qualifying acquisition, now is an ideal time to determine whether the QPP rules could create significant immediate tax savings.
About Schneider Downs Tax Services
Schneider Downs tax advisors have experience and expertise in a wide range of industries, including automotive, construction, real estate, manufacturing, energy & resources, higher education, not-for-profits and transportation. Our industry knowledge and focus ensure the delivery of technical tax strategies that can be implemented as practical business initiatives. To learn more, visit our dedicated Tax Services page.
