Could you use a break? The QPP deduction is a major new tax break for manufacturers

For manufacturers planning to build new facilities or expand their existing plants, last year’s One Big Beautiful Bill Act (OBBBA) introduced a powerful new tax incentive. Over the next several years, manufacturers may immediately expense the cost of constructing — or, in some cases, acquiring — qualified production property (QPP).

Unlike bonus depreciation — which allows you to expense the cost of equipment, machinery or certain interior improvements to commercial buildings typically depreciated over five to 15 years — the QPP deduction allows you to deduct up front the cost of real property that would otherwise be depreciable over 39 years.

Eligible property

QPP refers to the portion of nonresidential real property a company uses as an integral part of a U.S.-based qualified production activity (QPA). A QPA is an activity that substantially transforms raw materials (going beyond simple assembly) in the process of manufacturing, producing or refining a qualified product. Qualified products include any tangible personal property other than food or beverages prepared and sold at retail in the same building (for example, a restaurant).

Note that QPP does not include the portions of a manufacturer’s facility used for non-QPA functions. Excluded from QPP are offices used for administrative services as well as areas used for lodging, parking, sales, research, software development or engineering activities.

Requirements for expensing QPP

To claim the QPP deduction, a manufacturer must satisfy several requirements:

• The original use of the property must commence with the taxpayer (except for certain acquired property). It’s important to note that the OBBBA specifies that property used by the taxpayer’s lessee is not “used by the taxpayer,” although some commentators believe that certain related-party leases or partnership arrangements will qualify.
• Construction of the property must begin after January 19, 2025, and before January 1, 2029.
• The QPP must be placed in service before January 1, 2031.

There’s one key exception to the original use requirement: A manufacturer may claim the QPP deduction for existing property it acquires after January 19, 2025, and before January 1, 2029, provided the property was not:

• Used in a QPA by anyone from January 1, 2021, through May 12, 2025,
• Used by the taxpayer at any time before it was acquired, and
• Acquired from a related party.

Property acquired pursuant to a written binding contract executed before January 19, 2025, doesn’t qualify, even if the transaction is consummated between January 19, 2025, and January 1, 2029.

Be aware of recapture rules

To avoid tax surprises down the road, take note of the QPP deduction’s recapture provision. Under this provision, if a manufacturer claims the QPP deduction but stops using the property as a QPP within 10 years after placing it in service, a portion of the deduction is subject to recapture at ordinary income tax rates.

In addition, if QPP is sold or otherwise disposed of, the portion of the gain attributable to the QPP deduction will be recaptured and taxed as ordinary income. That’s because under the OBBBA, QPP is treated as Internal Revenue Code Section 1245 property. When such property is sold or otherwise disposed of, the gain is taxed as ordinary income to the extent of previous depreciation deductions and any gain beyond that amount is taxed as capital gain.

A long-term commitment

The purpose of the QPP deduction is to incentivize manufacturers to make long-term investments in production facilities. So, while the deduction offers remarkable tax benefits, manufacturers taking advantage of these benefits must be prepared to make a long-term commitment. If you think you may sell QPP or divert it to other activities within 10 years, be sure to incorporate potential recapture of the deduction into your planning.

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