This series of posts is designed to highlight some key tax planning strategies to consider for 2026. The One Big Beautiful Bill Act (OBBBA) introduced a new rule for Qualified Production Property (QPP) that allows taxpayers to elect to deduct 100% depreciation on nonresidential real property. This change is beneficial because a taxpayer can deduct up to 100% of the expenses on the property the year it is placed in service, rather than over 39 years, as was previously required.
The government is trying to promote new construction of manufacturing and production facilities with the QPP depreciation rule. In order to take the QPP depreciation deduction, taxpayers must elect out of bonus depreciation and elect QPP bonus depreciation on their tax returns. The election should be made the year that the property is placed in service.
Background
The following definitions and requirements must be met to qualify for this tax benefit.
Qualified Production Property
QPP is nonresidential real property that will be used for qualified production activity. The new manufacturing facility will be used by the taxpayer as an integral part of a qualified production activity. Property must be used for manufacturing, production, or refining tangible personal property that results in a substantial transformation. Nonresidential real property used for: offices, administrative services, sales, research, software engineering, lodging, or parking is not considered qualified production property.
Qualified Production Activities
QPA are the activities of manufacturing, production or refining qualified products. Agricultural and chemical production do not qualify. Qualified products are all tangible personal property that is used for a qualified production activity. This does not include a retail establishment where food or beverages are both prepared and sold.
Original Use Requirement
The property’s original use must begin with the taxpayer; a lessee of the property cannot qualify for this deduction. If this requirement is not met, there is a Special Acquisition Exception. This exception will apply if the used property in question was not used for a qualified production activity between 1/1/21 through 5/12/25.
Timing
Pay attention to these dates to ensure the property will meet the qualifications for the QPP depreciation deduction.
- Construction begins after 1/19/2025 and before 1/1/2029
- Facility must be placed in service after 7/4/2025 and before 1/1/2031
- Between 1/1/2021 and 5/12/2025 the property was not previously used in a qualified production activity
The property will be subject to a 10-year recapture period. If the property stops being used for a qualified production activity within the 10-year period, the depreciation taken will be recaptured as ordinary income.
Key Takeaway
If you are taxpayer who is building or purchasing nonresidential real property in the United States that is used for a qualified production activity, then the QPP 100% depreciation deduction is something to consider. Please contact a GYF professional for expert advice on the benefits of this new rule as well as other tax planning strategies.
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