Key Takeaways
- Qualified Production Property (QPP) may allow manufacturers to immediately deduct certain facility-related investments. For qualifying projects placed in service within the required timeframe, businesses may elect a 100% first-year depreciation deduction rather than recovering costs over decades.
- The opportunity extends beyond new facilities. Building expansions, production floor additions, modernization projects, and other investments tied to qualified production activities may be eligible, making this provision particularly relevant for growing middle-market manufacturers.
- The five-year planning window creates a strategic opportunity but careful planning is essential. Manufacturers should evaluate expansion plans early, document qualifying activities and costs, and work with their tax advisors to understand eligibility requirements, potential limitations, and the long-term implications of making the election.
For manufacturing business owners, the next several years may present a rare tax planning opportunity to turn facility growth into near-term cash flow.
As part of the recently enacted One Big Beautiful Bill Act, new rules under IRC § 168(n) allow an elective 100% first-year depreciation deduction for certain manufacturing-related real property, known as qualified production property (QPP). In practical terms, this means that a qualifying building expansion, production facility, or modernization project may generate immediate tax deductions, rather than recovering those costs over nearly four decades.
That acceleration matters. Many manufacturers are already evaluating whether to expand capacity, reshore production, automate processes, improve workflow, or modernize aging facilities. QPP creates a strong incentive to move those plans from “sometime in the next decade” into the next five years.
Important note: Additional IRS guidance and proposed regulations are expected. Manufacturers should view QPP as an evolving planning opportunity and confirm eligibility, documentation requirements, and tax impact before relying on the benefit.
What Is Qualified Production Property?
QPP generally includes the qualifying portion of nonresidential real property used as an integral part of a qualified production activity. To qualify, the property must meet several requirements, including that construction begins after Jan. 19, 2025, and before Jan. 1, 2029, and that the property is placed in service in the U.S. after July 4, 2025, and before Jan. 1, 2031.
For business owners, the key point is that QPP is not limited to equipment. It may apply to certain building components and production-area real estate that historically would have been depreciated over a much longer period.
The benefit is available only for the qualifying portion of the property, which makes project design and documentation especially important.
How the 100% First-Year Deduction Works
The QPP rule is structured as an election. If eligible property is placed in service during the required window, the taxpayer may elect to deduct up to 100% of the qualifying basis in the first year rather than recovering the cost over the standard depreciation life for nonresidential real property (i.e., 39 years!).
This can materially affect project economics. A manufacturer planning a $2 million production floor expansion may be able to deduct the qualifying portion immediately, improving after-tax cash flow and potentially freeing capital for equipment, hiring, inventory, or additional automation. The election is not automatic, however. The taxpayer must affirmatively designate the property with proper elections included on a timely filed tax return.
Caution: Immediate deductions do not always mean an immediate tax benefit. Please consult with your tax advisor to confirm the effective utilization and benefits of accelerating those deductions.
Which Activities Qualify?
A qualified production activity generally includes the manufacturing, production, or refining of a qualified product. A qualified product is generally tangible personal property, with an exclusion for certain food or beverage items prepared in the same building as the retail establishment where they are sold.
Importantly, the activity must involve substantial transformation. In plain language, the business must be doing more than storing, packaging, or lightly handling finished goods. The activity should convert raw materials, components, or inputs into a final, distinct product that is fundamentally different from what came in. Guidance gives qualifying examples such as turning wood pulp into paper, steel rods into screws and bolts, and freshly caught tuna into canned tuna.
Expansion Projects Can Count
One of the most practical opportunities is that QPP can apply not only to brand-new facilities, but also to expansions of existing facilities. That is important for closely held and middle-market manufacturers. A brand-new facility may be unrealistic, but a new production bay, additional line space, or targeted building expansion may be achievable.
This is where the five-year planning window becomes strategic. Owners should evaluate whether expected growth, customer demand, supply chain pressure, or automation needs justify accelerating construction into the 2025–2030 placed-in-service window.
Which Areas Are Excluded?
Not every part of a manufacturing building will qualify. Ineligible areas generally include space used for offices, administrative services, parking, sales activities, research, software development, engineering, finished goods storage, or other functions unrelated to the qualified production activity.
Related activities may qualify only when tied closely enough to the actual substantial transformation activity. A space used only for related design, planning, or IP activities generally does not itself create a qualified production activity.
Because most facilities are mixed-use, manufacturers should expect an allocation exercise. Guidance allows taxpayers to allocate basis between eligible and ineligible portions using any reasonable method, such as square footage, cost segregation data, architectural or engineering plans, process diagrams, or construction invoices. In practice, this means involving tax advisors, architects, engineers, and cost segregation professionals early, before plans are finalized.
Watch the 10-Year Recapture Rule
QPP should be viewed as a long-term operational commitment, not just a tax deduction. If property ceases to be used in a qualified production activity within 10 years after being placed in service, a recapture rule can apply. The disqualified portion may be treated as disposed of, and prior depreciation benefits may be recaptured as ordinary income.
That risk does not eliminate the opportunity, but it does require thoughtful planning. Owners should consider future product lines, leasing arrangements, possible facility conversions, and succession or sale scenarios before making the election.
Next Steps: How Manufacturers Can Leverage QPP for Tax Savings and Growth
QPP is more than a tax provision. It’s a planning tool that can influence when and how manufacturers invest in growth. For owners considering expansion, modernization, or new production capacity, the message is clear: don’t wait until the end of the decade to evaluate your facility strategy.
The best opportunities will likely go to businesses that plan early, document carefully, and align tax strategy with operational goals. If your company expects to expand production over the next several years, now is the time to model the after-tax cost, review facility layouts, and determine whether accelerating the project could turn a long-term growth plan into an immediate cash-flow advantage.
To learn more about how QPP and other manufacturing tax strategies may apply to your business, or to receive assistance with evaluating tax benefits, documenting qualifying investments, and addressing questions about eligibility and next steps, please contact us.