Can the qualified production property rule help your manufacturing firm reduce tax payments?

Qualified production property (QPP) is a tax provision that can help manufacturing businesses lower their cost of doing business by limiting tax exposure. Aimed at boosting or reshoring manufacturing in the United States, the tax incentive essentially expands 100% bonus depreciation rules to include certain real property used in qualified manufacturing activities.

However, the rules for QPP, which is also known as §168(n), are complicated and still need further clarification from the IRS, so even tax advisors’ understanding of the subject is continuing to evolve.

Keep reading to learn more about what QPP is and how it can help reduce your tax bill.

What is qualified production property?

Qualified production property is any part of a non-residential building that’s integral to carrying out a qualified production activity. Broadly speaking, this means elements of a factory or other production facility that are necessary to its core production operations.

• QPP is identified after first identifying short-life property or repairs in a cost segregation study.
• Most manufacturers already use cost segregation studies to identify non-building assets eligible for accelerated depreciation. These assets can include land improvements, such as parking lots or tangible personal property, like supporting electrical or mechanical connections for machinery.
• Qualified production property consists of the remaining parts of the building that are integral to the production process.

What is a qualified production activity?

A qualified production activity (QPA) is one that makes a substantial transformation to a qualified product via manufacturing, production or refining. Real property that is considered integral to performing a QPA may qualify as QPP.

What is the qualified production property tax incentive?

The qualified production property tax rule allows manufacturers to immediately deduct 100% of the cost of certain elements of a manufacturing building. Taxpayers may take this deduction the same year that qualified property is placed into service, creating a potential cash flow benefit for your business by giving you the opportunity to dramatically reduce your taxable income for that year.

• Qualified production property falls within the umbrella of the broader 100% bonus depreciation rule and was first created in 2025 when Congress brought back 100% bonus depreciation as part of the One Big Beautiful Bill (OBBB) Act.
• Prior to QPP being introduced, manufacturing machinery already qualified for bonus depreciation. However, manufacturing buildings generally did not and were subject to the same 39-year standard depreciation schedule as any other real estate property.

The qualified production property election is made on a timely filed tax return and generally cannot be revoked.

What are the eligibility requirements for qualified production property?

To be eligible for the qualified production property tax benefit, property must meet several requirements. These include:

• The property must be used as an integral part of a qualified production activity, including manufacturing, production, refining, agricultural production, or chemical production.
• The property must be nonresidential real property (or a qualifying portion thereof).
• The original use of the property must begin with the taxpayer, unless the used property exception applies.
• Construction must begin after January 19, 2025, and before January 1, 2029.
• The property must be placed in service before January 1, 2031.

There are also certain additional exclusions and limitations to consider here.

What parts of a building don’t count as qualified production property?

Elements of a building that are not integral to production don’t count as qualified production property. Certain types of property are expressly excluded from QPP treatment, including:

• Office space
• Research and development or software engineering areas
• Food or beverage retail preparation areas
• Property already qualifying for bonus depreciation under §168(k), (l) or (m)
• Property required to be depreciated under the alternative depreciation system (ADS)
• Taxpayer‑lessor property used by a lessee, even if the lessee conducts a qualified production activity

At present, the statute provides no exception for related‑party or consolidated‑group leasing arrangements. However, if property is owned by a single‑member LLC that is disregarded for federal income tax purposes and the SMLLC is owned by the operating entity, the property may still qualify for the §168(n) election.

Additional exceptions and rules may also affect your ability to claim QPP

If you are dealing with used property, property that has been sold or property that ceases to be used for production purposes, there are additional exceptions and rules that may be relevant. These include:

Used property exception

Used property may qualify for QPP treatment if all of the following conditions are met:

• The property was not previously used in a qualified production activity between 2021 and May 12, 2025.
• The property was not previously used by the taxpayer.
• The property was not acquired from a related party.
• The property was not acquired in a transaction involving substituted basis.

Syndication rule

Special syndication rules apply where property is placed in service by a lessor and sold within three months. In such cases, the last purchaser may still qualify for bonus depreciation under §168(n), provided the statutory requirements are satisfied.

Bonus depreciation recapture rule

Manufacturers who want to claim an upfront deduction for QPP need to consider another wrinkle: the bonus depreciation recapture rule. This essentially states that if you claim bonus depreciation on qualified production property but then switch that property to non-manufacturing uses within 10 years, you have to repay the deduction you claimed.

This creates another element that you need to evaluate. If you don’t know whether you will be able to maintain manufacturing activities for the next decade, you may want to hold off on claiming the QPP incentive and opt for a standard depreciation schedule instead.

IRS guidance clarifies rules for qualified production property

The IRS recently issued Notice 2026-16, which clarifies the rules on claiming a tax deduction for qualified production property. Highlights are described below:

• Identify eligible space: the portion of non-residential real property used as an integral part of the QPA, which includes production floors, processing rooms, equipment pads, in‑process storage directly feeding production, utility rooms and building systems dedicated to production (e.g., specialized HVAC, power, water or waste systems essential to production). While raw material storage is allowed, finished goods storage is not.

• Carve out ineligible space: which includes areas used for offices, administrative functions, research, software development, engineering, sales and marketing, general warehousing, finished goods storage, lodging, parking and other functions not directly involved in manufacturing, production or refining. Note that dual-purpose infrastructure is allowed, such as electrical systems.

• The notice goes on to provide that if at least 95% of the building’s space (by square footage or another reasonable measure) is used as an integral part of the QPA, the taxpayer may elect to treat the entire building as QPP. This can eliminate the need for detailed functional allocation in facilities that are overwhelmingly production‑oriented.

• If a building does not fall under the de minimis rule, allocate the unadjusted depreciable basis between QPP‑eligible and ineligible portions using a reasonable, consistent method supported by Notice 2026‑16 (for example, relative square footage, a cost‑segregation study that traces costs to specific areas or an engineering‑based allocation).

Designate QPP amount

Section 168(n) operates through an election to claim a 100% special depreciation allowance on some or all of the eligible QPP basis, made on a property‑by‑property basis.

For each asset or building, determine the “QPP‑eligible basis” and then decide whether to designate 100% of that basis as QPP or some smaller portion. Notice 2026‑16 requires an affirmative election for §168(n) by attaching a statement to the original timely filed return (including extensions) for the taxable year the QPP is placed in service. The statement should:

• Identify the taxpayer and tax year.

• Cite IRC §168(n) and Notice 2026‑16.

• List each item of property (or each building or component, consistent with your property‑by‑property approach) for which the election is made.

• State the amount of basis designated as QPP for each property.

Please note that the recapture rules incentivize taxpayers to use cost segregation to identify tangible personal property and qualified improvement property, carve those 100% bonus depreciation-eligible items out of the building basis and then elect section 168(n) treatment for the remaining, qualified areas. This limits recapture if the building use changes to a non-qualifying purpose too soon.

How should manufacturers take action to claim the qualified production property tax incentive?

There are actions you can take right now to potentially reduce your tax burden via the qualified production property tax rule. These include:

1. Consult your tax advisor

Don’t try to navigate QPP on your own. If you don’t have a tax advisor with experience in both bonus depreciation and the holistic intricacies of taxes for manufacturing businesses, get one.

2. Conduct a cost segregation study

A cost segregation study will assess your existing production assets to figure out what qualifies for 100% bonus depreciation. This includes taking steps to determine what counts as qualified production property.

3. Do further analysis to determine what qualifies as QPP

On its own, a cost segregation study is not sufficient to determine whether property meets the criteria for QPP. Determining whether there has been a substantial transformation of the property comprising the product is a difficult question that may also involve documenting the facts and circumstances of the production process or a deep dive into the taxpayer’s cost accounting data.

Taxpayers who acquired existing property from an unrelated party also have to document that it was not used for production from January 1, 2021, through May 12, 2025.

4. Assess your QPP ownership structure

Manufacturers frequently create separate legal entities to hold ownership over buildings used for manufacturing purposes. While this can be useful from a liability perspective, it can also complicate your ability to claim bonus depreciation for QPP and is something you must review with your tax advisor.

5. Decide if claiming bonus depreciation for QPP actually makes sense

While claiming an upfront deduction for QPP may be highly beneficial in many circumstances, it won’t benefit all manufacturers in all situations. In fact, due to a stringent depreciation recapture rule, it could even be harmful in certain cases, so it’s important to assess your specific needs before proceeding.

How Wipfli can help

Discover if and how you can use tax incentives like qualified production property to strengthen your business. Ask our team to assess your needs, conduct a cost segregation study and devise a tax strategy to benefit your business. Start a conversation.

Find out if you qualify for tax incentives like QPP

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