How can manufacturers benefit from new tax incentives for qualified production property?
In 2025, Congress created a new tax incentive for qualified production property (QPP). 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.
For manufacturers, specifically, this new QPP tax incentive can present a major opportunity to limit tax exposure. However, the rules are complicated, nuanced and still awaiting clarification from the IRS, so even tax advisors’ understanding of the subject is continuing to evolve.
Keep reading to learn more about what the new QPP tax incentive is and how to apply the benefits to your business.
What is qualified production property under the new tax law?
Qualified production property is any part of a building that’s integral to carrying out a qualified production activity. A qualified production activity is one that makes a substantial transformation to a qualified product via manufacturing, production or refining. QPP is a new category that is identified after 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, such as the supporting electrical or mechanical connections for machinery. In some cases, portions of the buildings are eligible for short-life treatment as qualified improvement property.
- Qualified production property consists of the remainder of the building, as long as it is integral to the production process. Areas such as parking lots, offices, R&D activities, sales or engineering are not QPP.
- However, not all elements of a building are integral to production. Historically, “integral to” has swept broadly to include many assets not directly used in the production process itself. Forthcoming guidance should address topics like dual-use property, the scope of integral activities and the extent to which substantial transformation incorporates existing guidance under IRS code section 954.
- Because the IRS has not yet issued guidance clarifying the new QPP tax incentive, there is a significant level of uncertainty here. You and your tax advisor should watch closely for additional updates to help you better understand how to apply the QPP incentive to your situation.
What is the new qualified production property tax incentive?
When Congress brought back bonus depreciation at 100% as part of the One Big Beautiful Bill (OBBB) Act, it also extended the rule to include QPP for the first time. This new election gives manufacturers a new opportunity to deduct 100% of the cost of certain essential elements of a manufacturing building upfront.
- Prior to this year, 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.
- To qualify for an upfront 100% deduction, QPP must be constructed on or after January 20, 2025, and before January 1, 2029.
- It must also be placed into service no later than December 31, 2030.
- There are also additional qualifying elements to consider, including which legal entity actually owns the manufacturing building and whether you purchased the property from an unrelated party who may have used it for production purposes.
How should manufacturers take action to claim the qualified production property tax incentive?
Claiming the QPP incentive is complicated. As the IRS has not yet issued clarifying guidance on how to actually implement the incentive, tax advisors are forced to make good faith assessments and wait for additional information from the Treasury.
However, there are actions you can take right now to prepare to maximize your opportunities under the new incentive. 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.
What is the bonus depreciation recapture rule for qualified production property?
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.
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.
Claim your tax incentives
