What Qualifies as Qualified Production Property?

For manufacturers and industrial developers, Qualified Production Property (QPP) offers a powerful tax incentive, but one that requires careful planning and strict compliance with eligibility rules.

As interest continues to grow around qualified production property provisions, many taxpayers are asking a key question, “What actually qualifies as QPP?”

Understanding how QPP is defined, which assets are eligible, and where limitations apply is critical to maximizing depreciation and avoiding costly mistakes.

In this article, we outline the core criteria used to determine QPP eligibility and how to position your investment strategy to get the full tax benefits.

What Is Qualified Production Property?

Qualified Production Property (QPP) is a newly introduced category under IRC §168(n), established by the One Big Beautiful Bill Act (OBBBA). It applies to the qualifying portion of nonresidential real property used as an integral part of manufacturing, production, or refining activities. The purpose of this provision is to encourage domestic industrial investment by allowing an elective 100% special depreciation allowance on qualifying facilities.

This represents a significant shift from traditional nonresidential real property, which is typically depreciated over 39 years under the Modified Accelerated Cost Recovery System (MACRS). With proper classification and timing, the qualifying portion of a property that meets QPP criteria can be fully expensed in the year it is placed in service, resulting in immediate tax savings and improved cash flow.

Requirements for QPP Eligibility

To qualify for 100% bonus depreciation as Qualified Production Property (QPP), the property must meet specific eligibility criteria:

1. Qualified Production Activity: The property must be used by the taxpayer as an integral part of a qualified production activity. This means the structure must directly support core operations such as manufacturing, processing, or refining, and not merely serve a supportive or adjacent role. The use must be essential to the production process, rather than administrative or ancillary.

2. Original Use and U.S. Location
   The original use of the property must begin with the taxpayer, and the property must be located within the United States or its territories. In practice, this means previously used buildings, acquisitions of existing facilities, or imported structures do not qualify.

   “Original use” refers to the first time the property is placed in service for any purpose by any taxpayer. To meet QPP requirements, the building must be newly constructed or developed by the taxpayer claiming the deduction. This includes ground-up construction or development on previously undeveloped land.

   If a building has already been used, occupied, or placed in service by another party, even if it has never been depreciated, it generally does not meet the original use requirement. Similarly, acquiring an existing property and renovating or repurposing it into a production facility does not qualify as QPP.
   However, certain improvements or additions made after acquisition may still qualify for 100% bonus depreciation under separate rules, provided they meet the criteria for new property placed in service by the taxpayer.

3. Manufacturing or Production Use: The property must be used primarily for qualified production activities, including:

   • Manufacturing or assembly of tangible goods
   • Refining or chemical processing
   • Fabrication or extraction operations

   Areas used for office functions, lodging, research and development, sales, or general administration are explicitly excluded. If these functions exist within the same facility, their square footage must be separated and will not qualify for bonus depreciation.

4. Construction Start Date: To qualify, construction must begin after January 19, 2025, and before January 1, 2029. Projects already in progress before January 19, 2025, are generally excluded unless they fall below the 10% completion threshold for total project costs (including both soft and hard costs).

5. Placed-in-Service Deadline: To qualify as Qualified Production Property (QPP), the property must be placed in service after July 4, 2025, and before January 1, 2031.

6. Timely Election on Tax Return: Taxpayers must make a formal election under IRC §168(n) on the tax return for the year the property is placed in service. If this election is not made, the property will default to standard MACRS depreciation.

   Example:
   In 2026, a taxpayer acquires land and constructs a new manufacturing facility, placing it in service in 2028. The building is composed of 80% manufacturing space and 20% administrative office space.

   Under the OBBBA, the portion of the building used directly for manufacturing qualifies as QPP and is eligible for 100% bonus depreciation. The office space, however, does not qualify and must be depreciated under standard MACRS rules.

   Land and land improvements, such as parking lots and landscaping, are also excluded from QPP treatment. However, certain components may still qualify for bonus depreciation under separate provisions.

Limitations and Exclusions

Qualified Production Property (QPP) is subject to several important limitations:

• Leased Property: Buildings leased to unrelated tenants generally do not qualify unless the lessee also meets the original use requirement and uses the property for qualifying production activities.

• Related Party Transfers: Properties acquired from related parties are excluded, even if they are used for manufacturing or production.

• Dual-Use Facilities: If any portion of the property is used for non-production purposes (such as office space), that portion must be excluded from bonus depreciation calculations.

• Recapture Risk: If the property is no longer used for qualified production within 10 years of being placed in service, the IRS may require recapture of previously claimed depreciation benefits.

Planning Considerations

To maximize tax savings and ensure compliance, consider the following strategies throughout the development process:

• Segregate Functional Space: Clearly distinguish qualifying production areas from non-qualifying spaces in architectural plans.

• Track Timelines and Costs: Maintain detailed documentation of construction timelines and costs to support eligibility requirements, including start dates and placed-in-service deadlines.

• Review Related Party Transactions: Evaluate contracts carefully to avoid disqualifying related party issues.

• Coordinate Tax Elections: Work closely with your CPA to ensure the IRC §168(n) election is made accurately and on time.

A cost segregation study can further enhance your strategy by identifying and separating qualifying QPP components from non-qualifying areas and other structural elements, helping optimize depreciation and maximize overall tax savings.

How To Structure A 1031 Exchange Involving Qualified Production Property?

To structure a 1031 exchange for qualified production property, you need to follow the IRS rules for like-kind exchanges under Section 1031 of the Internal Revenue Code. Here’s a step-by-step guide tailored for a qualified production property:

1. Confirm Property Qualification: Both the relinquished and replacement properties must be real property held for productive use in a trade or business or for investment (and not held primarily for sale). This can include many types of commercial, industrial, or agricultural real estate, depending on how the taxpayer holds and uses the property.

2. Ensure Like-Kind Status: The replacement property must be “like-kind” to the relinquished property. For real estate, “like-kind” is broadly interpreted, for example, farmland can be exchanged for commercial or rental properties, as long as both are held for business or investment use.

3. Use a Qualified Intermediary (QI): You cannot receive the sale proceeds directly. Instead, a qualified intermediary must hold the funds from the sale of the relinquished property and use them to purchase the replacement property. This is critical to maintain the tax-deferred status of the exchange.

4. Follow the Strict Timeline: According to the IRS, you must identify potential replacement properties within 45 days of selling your relinquished property. Then, you must close on the replacement property within 180 days of the sale.

5. Structure the Exchange Transaction: The transaction can be structured as a simultaneous exchange or a delayed exchange. In a delayed exchange, the replacement property is purchased after the sale of the relinquished property, using the qualified intermediary to hold funds in escrow.

6. Consider State Rules and Depreciation Recapture: While federal taxes are deferred, state tax treatment can vary. Also, depreciation recapture on the relinquished property can be deferred if the exchange is structured correctly.

7. Documentation and Reporting: Complete IRS Form 8824 to report the exchange when filing your tax return. Keep detailed records of both transactions and the use of a qualified intermediary.

Final Thoughts

Qualified Production Property (QPP) under the One Big Beautiful Bill Act (OBBBA) presents a significant opportunity for manufacturers and industrial developers to fully depreciate qualifying capital investments in the year they are placed in service. However, this benefit comes with strict eligibility requirements and technical considerations that must be carefully managed.

By understanding the key provisions of IRC §168(n) and working closely with tax professionals throughout the planning, construction, and reporting process, taxpayers can effectively leverage this strategy to maximize depreciation and unlock meaningful tax savings.

Looking to determine if your property qualifies for QPP? Contact SegTax to explore how a cost segregation study and strategic tax planning can help you maximize your depreciation benefits.