Recent legislation has introduced a meaningful, though temporary, tax opportunity for businesses involved in manufacturing and production. The One Big Beautiful Bill Act, commonly referred to as OBBBA, created a special depreciation allowance for Qualified Production Property, or QPP, that may allow eligible businesses to accelerate tax deductions for certain facilities.
For organizations planning new construction, expansions, or improvements, understanding how this provision works can support more intentional and informed financial decisions.
What Changed Under the OBBBA
Under prior tax law, most nonresidential real property used in manufacturing or production was required to be depreciated over a thirty nine year period. The OBBBA introduced a new election that allows eligible taxpayers to deduct one hundred percent of the adjusted basis of certain qualified property in the year it is placed in service.
In practical terms, this functions as bonus depreciation for certain production facilities and buildings.
This special depreciation allowance generally applies to qualifying property that is placed in service after July 4, 2025 and before January 1, 2031. Construction must begin after January 19, 2025 and before January 1, 2029.
IRS Guidance Provides Helpful Clarity
To assist taxpayers in applying this new provision, the IRS issued interim guidance in Notice 2026 16. Taxpayers may generally rely on this guidance until formal regulations are released. The notice outlines how to identify qualifying property and activities and explains how to allocate costs when properties serve multiple purposes.
What Is Qualified Production Property
Under the guidance, Qualified Production Property generally includes nonresidential real property that meets all of the following criteria.
- First, the property must be subject to the Modified Accelerated Cost Recovery System.
- Second, it must be used by the taxpayer as an integral part of a qualified production activity.
- Third, it must be placed in service in the United States or one of its territories.
In most cases, the property’s original use must begin with the taxpayer. Certain used property may qualify under special rules.
The Integral Part Requirement
Property is considered an integral part of a qualified production activity when that activity takes place within the physical space of the property. Each unit of property, including additions or improvements, must independently meet this requirement.
The guidance allows flexibility for integrated facilities. Multiple buildings that operate together on the same or contiguous parcels of land may be treated as a single unit of property. For example, a building used to store raw materials that directly support manufacturing activities in nearby facilities on the same site may be treated as part of an integrated production facility.
There is also a de minimis rule. If at least ninety five percent of a property’s physical space is used as an integral part of a qualified production activity when the property is placed in service, taxpayers may elect to treat the entire property as qualifying.
Property That Does Not Qualify
The guidance identifies several types of property that are not considered Qualified Production Property. This includes space used for offices and administrative services, sales and marketing activities, research or engineering functions, software development, lodging, parking, and the storage of finished goods.
In addition, property used by a lessee is generally not considered to be used by the lessor as part of a qualified production activity. Exceptions apply for certain intercompany leases within consolidated groups and commonly controlled entities.
Allocating Costs Between Qualifying and Nonqualifying Use
When a property includes both eligible and ineligible uses, taxpayers may allocate the unadjusted depreciable basis using any reasonable method. Acceptable approaches may include square footage calculations, cost segregation studies, architectural or engineering plans, process diagrams, or construction invoices.
Reasonable allocation methods may also be used for dual use infrastructure such as heating, ventilation, air conditioning, or fire protection systems that serve both qualifying and nonqualifying areas.
What Is a Qualified Production Activity
A qualified production activity generally involves the manufacturing, production, or refining of a product that results in a substantial transformation. This means the process creates a final product that is fundamentally different from its original raw materials or components.
The guidance takes a practical approach to defining qualified production activities. In addition to core manufacturing processes, essential and related activities may also qualify. These may include receiving and storing raw materials used in production, as well as oversight and direction of production operations.
The guidance also provides specific definitions for manufacturing, production, and refining. Notably, the term production is limited to activities in the agricultural and chemical industries.
Additional Considerations
The interim guidance also addresses election procedures, a safe harbor for certain property placed in service during 2025, and depreciation recapture rules. If a qualifying property changes use within ten years of being placed in service, a portion of the depreciation may be recaptured as ordinary income.
These provisions make it important to evaluate not only initial eligibility, but also the long term implications of claiming the deduction.
Our Perspective
At CD Bradshaw and Associates, we believe tax planning is most effective when it supports a business’s broader goals. Opportunities like the Qualified Production Property depreciation allowance are best evaluated in the context of growth plans, operational strategy, and long term sustainability.
If your organization is constructing, expanding, or upgrading production facilities, this provision may present a meaningful opportunity. Our team is here to help you understand how the guidance applies to your situation and to coach you through intentional, well informed decisions.
If you’d like clarity on how this topic applies to your business, let’s talk! Informed, intentional decisions are always worth the conversation.
