A New, 'Quiet' Tax Provision Benefits Manufacturers

The One Big Beautiful Bill Act generated considerable attention for extending 100% bonus depreciation for new assets, but manufacturing executives should focus on a quieter provision that could prove far more transformative: Qualified Production Property (QPP).

This new section creates an entirely distinct property class eligible for immediate 100% expensing—but only for companies willing to own and build their manufacturing facilities from the ground up or acquire existing  property that has not been used as a manufacturing facility since 2021.

While bonus depreciation affects all qualifying personal property, QPP specifically targets manufacturing, production and refining activities with a clear message: America wants to incentivize domestic manufacturing growth, not just equipment purchases.

Beyond Equipment: Buildings as Immediate Tax Deductions

Consider the impact on a recent client project: a billion-dollar food manufacturing facility in Texas. Under traditional depreciation, the building structure would generate tax deductions over nearly four decades. With QPP qualification, a substantial portion of the facility structure becomes immediately deductible, fundamentally altering the project's return on investment and cash-flow timing.

Traditional manufacturing tax planning focuses heavily on equipment and machinery through bonus depreciation and Section 179 expensing. QPP breaks new ground by treating qualifying areas within manufacturing buildings as Section 1245 property eligible for immediate expensing—a designation previously reserved for personal property like equipment.

This distinction matters enormously for project economics. Under previous rules, a manufacturing facility's structure would depreciate over 39 years, while equipment qualified for accelerated depreciation. QPP collapses this timeline for qualifying buildings.

The Owner-Occupancy Mandate

QPP's most significant requirement may be its insistence on owner-occupancy. The legislation explicitly states that building owners cannot claim QPP benefits even when tenants conduct qualifying manufacturing activities. Simultaneously, tenants cannot claim benefits on buildings they don't own. This creates a "no-man's land" where neither party in typical lease arrangements can access QPP benefits.

This provision represents a deliberate policy choice to encourage manufacturing ownership rather than the increasingly common practice of leasing manufacturing space. For many companies, this could force a fundamental reevaluation of real estate strategies that have historically favored leasing for flexibility and capital efficiency.

The implications extend beyond individual companies to entire industrial real estate sectors. Industrial real-estate investment trusts (REITs) and specialized manufacturing property owners may find their value propositions challenged as tax benefits flow exclusively to owner-operators.

Companies also must follow the General Depreciation System, which most taxpayers follow unless they have other tax implications that require the use of Alternative Depreciation System. 

Navigating the Gray Areas

Several critical aspects of QPP await Treasury guidance, creating both opportunities and risks for early movers. The legislation defines qualifying activities as "manufacturing, production, or refining of a “qualified product,” but includes specific limitations on production activities, restricting them to agricultural and chemical production.  It also specifically excludes “food or beverage prepared in the same building as a retail establishment” from being considered a qualified product. 

The construction timing requirements add another layer of complexity. QPP requires construction to begin after January 19, 2025, and facilities must be placed in service before January 1, 2031. However, the legislation provides no safe harbor for determining when construction "begins"—a critical threshold that could determine QPP eligibility for projects already in development.

Historical precedent suggests the Department of Treasury may provide percentage-based safe harbors like those used for energy-efficiency credits, where projects with less than 10% of costs incurred by a certain date qualify for new rules. Manufacturing executives should carefully document construction timelines and consider whether delaying groundbreaking might optimize QPP benefits.

Mixed-Use Facility Challenges

QPP's scope extends beyond simple manufacturing equipment to encompass entire manufacturing buildings, but specifically excludes office, administrative, lodging, parking, sales, research, software development and engineering activities areas (basically any areas of the building that are unrelated to the manufacturing, production or refining of tangible personal property). This creates complex allocation challenges for typical manufacturing facilities that integrate production with support functions.

Unlike Qualified Improvement Property (QIP), which applies only to interior improvements, QPP appears to encompass entire building structures where manufacturing occurs. This broader scope could include structural elements, building shells, and major building systems—but only for the portion of facilities dedicated to qualifying activities.

Real-World Impact

When QPP qualification are properly documented and allocated, the impact of these calculations can be dramatic. For example, a manufacturing client would typically receive a first-year tax depreciation deduction equal to 25-40% of their total construction spend generated from a traditional cost segregation study.  With QPP, these tax deductions could easily double, creating substantial tax cash savings. These benefits represent real cash-flow improvements that can fund additional hiring, equipment purchases or facility expansions.

The recapture provisions add another planning dimension. QPP benefits are subject to depreciation recapture if facilities are disposed of within 10 years of the placed-in-service date. This creates a minimum ownership period for optimal tax treatment, potentially affecting exit strategies and facility planning horizons.

Strategic Planning Imperatives

Manufacturing executives should immediately assess how QPP affects their facility strategies, particularly given the limited window for qualifying projects. The requirement for construction to begin after January 19, 2025, but before January 1, 2029, means companies must move quickly to restructure planned projects for QPP optimization.

For companies currently leasing manufacturing space, QPP creates incentives to reevaluate ownership strategies. The tax benefits may justify ownership arrangements that previously seemed less attractive from a capital allocation perspective. This calculation becomes particularly compelling for companies planning major facility expansions or relocations.

QPP's effectiveness depends heavily on Treasury guidance that may take months or years to develop. The current IRS and Treasury staffing challenges could delay critical clarifications on construction timing, mixed-use allocations, and activity definitions. Early movers may need to proceed with incomplete guidance, creating both first-mover advantages and regulatory risks.

Preparing for Implementation

Manufacturing executives should begin QPP evaluation immediately, even while awaiting Treasury guidance. Key preparation steps include:

The Broader Manufacturing Renaissance

QPP represents more than a tax provision—it signals a fundamental policy shift toward incentivizing domestic manufacturing capacity. Combined with broader supply chain concerns and geopolitical considerations, QPP may accelerate manufacturing reshoring trends that were already gaining momentum.

The provision's emphasis on new construction and owner-occupancy aligns with broader goals of building permanent domestic manufacturing capacity rather than simply relocating existing operations. This focus on greenfield development could drive manufacturing investment in regions with available industrial land and skilled workforces.

As global supply chains continue evolving and manufacturing reshoring accelerates, QPP provides powerful incentives for companies choosing to build domestic manufacturing capacity. The provision's success in driving manufacturing investment will ultimately depend on how effectively companies can integrate its requirements into their broader strategic planning processes.