A Guide to Qualified Production Property (QPP)
The One Big Beautiful Bill Act (OBBB) introduces IRC § 168(n), establishing a new category of property—Qualified Production Property (QPP)—eligible for 100% bonus depreciation. This provision offers a significant planning opportunity for taxpayers investing in qualified manufacturing, production, or refining facilities. This article outlines the statutory framework, key definitions, and practical considerations CPAs should be aware of when advising clients on QPP.
Qualified Property
The addition of QPP under the newly added IRC §168(n) is defined as any portion of nonresidential real property that is–
- Used by the taxpayer as an integral part of a qualified production activity
- Placed in service in the United States (or any possession)
- Original use commences with the taxpayer
- The construction begins after January 19, 2025, and before January 1, 2029
- Placed in service before January 1, 2031
Importantly, QPP does not include property which the alternative depreciation system (ADS) applies, nor does it apply to lessors when the property is used by a lessee in a qualified activity.
The definition of qualified property also allows for special rules for certain property not previously used in qualifying production activities. The property must not have been used in manufacturing, production, or refining by any person between January 1, 2021, and May 12, 2025, and such property cannot have been used by the taxpayer at any time prior to the acquisition of such property. The acquisition must meet the same related party requirements as with other bonus depreciation considered for used property, however if under contract, the contract must not be binding and entered until after January 19, 2025.
The rules specifically exclude certain types of property from the definition of QPP. The addition by OBBB of IRC § 168(n)(2)(C) states that QPP shall not include any portion of the property, which is used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other functions unrelated to the manufacturing, production, or refining of tangible personal property.
Qualified Production Activity
Under IRC § 168(n)2(D) as added by OBBB, the term qualified production activity means the manufacturing, production, or refining of a qualified product if the activity results in a substantial transformation of the property comprising the product. The statue as written requests regulations to provide rules regarding what constitutes substantial transformation, and requests that such rules be consistent with guidance under IRC § 954(d). In the interim, taxpayers can look to the Subpart F rules under Treas. Reg. § 1.954-3 for guidance. These regulations provide examples of substantial transformation as follows:
- Converting wood pulp to paper
- Machining steel rods into screws and bolts
- Processing, canning, and selling fish (raw fish to canned fish is considered substantial)
Further refining qualified production activities, the section states that “production” shall only include agricultural and chemical production activities. The term product means any tangible personal property but excludes food or beverages prepared in the same building in which the product is sold.
Other Rules
The provisions governing QPP are elective, and taxpayers will have to wait for additional guidance to determine if this election will need to be affirmative or presumed as with other bonus depreciation classes. Similar to other property eligible for bonus depreciation, QPP will be treated as a separate class of property for IRC § 168(k)(7) purposes regarding the election out of bonus. QPP will also be subject to various recapture provisions including if the property ceases to be used in a qualifying activity during the first 10 years and is added to the definition of IRC § 1245 property.
Observations
- Timing Is Critical: Eligibility hinges on both construction start (after January 19, 2025) and placed-in-service dates (before January 1, 2031). Taxpayers must also ensure contracts are non-binding and executed after the start date to qualify.
- Segmentation Matters: For complex or large-scale projects, a cost segregation study may be essential to accurately identify qualifying portions of nonresidential real property used in eligible production activities.
- Definition Gaps Remain: The statute defers the definition of “substantial transformation” to future regulations, referencing IRC § 954(d). In the meantime, taxpayers may refer to Subpart F guidance under Treas. Reg. § 1.954-3.
- Excluded Uses: QPP specifically excludes areas used for office functions, R&D, lodging, and other non-production-related activities, requiring careful functional allocation of space.
