Key Insights
- 100% bonus depreciation has been permanently restored for most acquired or constructed assets placed in service after January 19, 2025.
- A new asset class — qualified production property (QPP) enacted under Section168(n) — allows real estate owners to immediately expense the manufacturing-use portion of nonresidential real property. This is separate from the standard Modified Accelerated Cost Recovery System (MACRS) bonus and can apply to parts of a building that are traditionally 39-year assets. Office, retail and other non-production areas do not qualify.
- Placed-in-service timing matters:
- QPP In-service Window: Must be constructed or acquired between January 20, 2025, and December 31, 2028, and placed in service before January 1, 2031 (watch for regulations). Binding contract rules apply to acquired property.
- 100% Bonus: Constructed or acquired and placed in service after January 19, 2025.
- Cost segregation becomes an essential tool as it provides solid QPP expensing guidance for building areas that are “integral to qualified production activity,” in addition to breaking out the 100% bonus eligible personal property/land-improvement assets.
How Permanent Bonus Depreciation and QPP Rules Reshape Cost Segregation
Restored 100% Bonus Depreciation
The new law permanently reinstates 100% bonus for most MACRS property with a recovery period of 20 years or less. That means machinery and equipment, certain finishes, process-specific plumbing and electrical, and land improvements placed in service after January 19, 2025, generally receive full expensing in year one.
Implication for Cost Segregation Studies
By making 100% bonus depreciation permanent, decision-making on capital-intensive real estate deals now has long-term clarity in their complicated modeling and capital stacks.
QPP: New Expensing for Part of the Building
Internal Revenue Code (IRC) Section 168(n) introduced QPP. Under the new asset class, the production-use portion of the U.S.-based, nonresidential building can be eligible for QPP treatment. Office, sales and retail areas, as well as other support spaces, are excluded from QPP.
Implication for Cost Segregation Studies
Cost segregation becomes more valuable than before, as a defensible study is now the mechanism to:
- Map the facility into production versus non-production floor area
- Substantiate the eligible QPP property eligible for 100% immediate expensing
- Use the remaining non-production portion of the 39-year real property as the basis for a cost segregation study, where 100% bonus will apply
Placed-in-Service Timing Rules To Know
- QPP Window: Property acquired or constructed between January 20, 2025, and December 31, 2028, and placed in service before January 1, 2031, is generally eligible for the QPP expensing election. It will be imperative to plan acquisition and construction agreements accordingly.
- 100% Bonus: Applies to property that is acquired or constructed and placed in service after January 19, 2025. However, property acquired under written binding contracts in effect before January 20, 2025, may be excluded.
For projects spanning the transition between applicable bonus rates, lock in placed-in-service dates and maintain documentation (construction contracts, closing documents, building certificates of occupancy). Bonus depreciation and QPP eligibility are date-specific and may require evidence under review.
QPP Nuances for Facilities With Back-office Functions
Most manufacturing facilities include non-production areas, such as administrative offices, human resources, accounting, showrooms, conference rooms, cafeterias, daycare, lobbies, fitness rooms and more. Under QPP, non-production areas are excluded from QPP treatment.
Additionally, production support areas (quality control, work in process storage, tool maintenance) that will qualify for QPP treatment are yet to be quantified. Future guidance on this is expected. In preparation for future guidance, building owners should maintain floor plans, production flow diagrams and narratives from plant support staff.
QPP Election & Bonus Depreciation: Cost Segregation Tax Benefit Changes
Enhanced Expensing
The QPP election can move a large share of the building shell and core (normally 39-year property assets) into current-year expensing. This is benefit far larger than traditional stand alone cost segregation study and is the biggest shift in value.
Diminished Benefits
On short-life equipment and easily identifiable land improvements, the federal benefit from cost segregation is less pronounced post-January 20, 2025, because 100% bonus depreciation already delivers expensing without the study. Cost segregation studies will still be very beneficial for breaking out process-related personal property and less identifiable site improvements.
Documentation the IRS May Expect
- Engineering-based cost segregation report identifying:
- (1) Traditional IRC Section 1245 property and land improvements for bonus;
- (2) Building costs by production vs. non-production use.
- Floor plans, production flow diagrams and process narratives from plant engineering; engineering analysis supporting integral use.
- Placed-in-service evidence, construction contracts and binding agreement dates for bonus eligibility.
Action Checklist for 2025 – 2028 Projects
- Decide early whether the project can meet the QPP construction and placed-in-service timing (2025 – 2028 build; placed in service by December 31, 2030).
- Design for QPP by pushing back-office space off the production footprint where possible while keeping quality control, maintenance and process control inside the production envelope with traceable integration.
- Commission a cost segregation/QPP study at 60% – 90% design for pro-forma and again at final for the return.
- Be mindful of decoupling by modeling states that don't follow federal bonus/QPP to capture state-tax economics.
- Coordinate elections on the original return for the place in service year and retain disclosures per guidance.
Case Study: 200,000 SQ. Manufacturing Plant (Placed in Service 2027)
Let’s look at a real-world example showing how QPP, cost segregation and bonus depreciation work in practice.
Overview
- Total project cost: $100,000,000 (turnkey)
- Qualifying production area of 160,000 sq. ft. and 40,000 sq. ft. of offices/cafeteria/training
- New build started 2026, placed in service in 2027 (before January 1, 2031).
- Site improvements and process-related equipment/finishes otherwise eligible for 100% bonus (in service after January 19, 2025)
Without QPP (Traditional Rules Only)
- Building shell/core: Generally, all 39-year property assets (no immediate deduction)
- Cost segregation study would reclassify about 15% – 25% of project costs into five, seven, and 15-year assets. Post January 19, 2025, those reclassified assets would qualify for 100% bonus.
With QPP and Cost Segregation
- QPP percentage = production-use portion (160,000/200,000 = 80%) of the building cost (exclusive non-building equipment already eligible for bonus).
- If $80 million is allocable to building (after carving out equipment and sitework), ~$64 million (80%) is immediately expensed under Section 168(n) QPP in 2027. The remaining $16 million (offices, cafeteria, etc.) stays on 39-year real property, subject to normal cost-segregation to identify any short-life components, which then qualify for 100% bonus depreciation.
Cash-tax Impact (Illustrative, Federal Only at 21%)
- QPP immediate deduction: $64,000,000 to $13.4 million* tax reduction in year one.
- Bonus on short-life assets from cost segregation in both areas: estimated at $4 million to $840,000 in additional year one tax reduction
- Total potential year one federal cash-tax reduction ≈ $14.3 million* plus any state benefits, subject to decoupling
*Numbers are simplified; actual results depend on detailed engineering analysis.
Bottom Line
The 100% bonus depreciation, effective January 19, 2025, significantly enhances expensing for short-lived assets and land improvements. QPP acts as a game-changer by converting substantial portions of what was previously considered 39-year property into immediate deductions for facilities with qualifying production areas.
Cost segregation plays a crucial role as the qualifying engine, demonstrating how much of your facility is integral to production versus excluded support, thereby determining the size of your QPP deduction and ensuring audit-ready documentation.
Your Guide Forward
The Cherry Bekaert Tax Credits & Incentives team is a reputable cost segregation provider with extensive experience in cost segregation and bonus depreciation. Our professionals help businesses navigate changing provisions and are ready to answer any questions you may have about how Cherry Bekaert’s services can help you.
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