High-up view of the interior of a manufacturing processing plant

Qualified Production Property: Boosting U.S. Manufacturing With 100% Deductions

Article

August 6, 2025

IRC Section 168(n) is a new provision of the tax code enacted as part of P.L. 119-21, “One Big Beautiful Bill Act,” that provides a significant tax incentive for businesses investing in certain production facilities in the U.S. meeting several Qualified Production Property (QPP) requirements. It allows taxpayers to deduct 100% of the costs of eligible property in the year it was placed in service.

The myriad rules governing this new provision are outlined below, as well as how your Cherry Bekaert advisor can assist with navigating them.

What Is Qualified Production Property?

QPP is defined as nonresidential real property used by the taxpayer that is an integral part of a qualified production activity. Qualified production activities include manufacturing, production or refining of a qualified product. Generally, a qualified product is tangible personal property, though see exclusion below).

The activities must involve a "substantial transformation" of the property comprising the product (guidance from the IRS or Treasury to follow). Qualified product does not include food or beverage prepared in the same building as a retail establishment in which such property is sold (restaurant, brewery, etc.).

Additional requirements include:

The property must be placed in service within the U.S. or a U.S. possession.
Original use of the property must commence with the taxpayer, with construction starting after January 19, 2025, and before January 1, 2029.

What Property Fails To Qualify As QPP?

QPP does not include the portion of real property which is used for:

Offices
Administrative services
Lodging
Sales activities
Research/engineering activities
Other functions unrelated to the manufacturing, production or refining of tangible personal property

In cases where the taxpayer is a lessor, property used by the lessee is not considered QPP for the lessor.

It also does not include assets subject to alternative depreciation system (ADS) treatment. QPP is treated as a separate asset class of property.

What Other QPP Rules Should Taxpayers Be Aware Of?

Taxpayers must make a QPP election to claim the deduction for eligible property, the specifics of which need to be defined by the IRS or Treasury.

Recapture rules apply If the property ceases to be used for a qualified production activity within 10 years, the taxpayer will be treated as having sold the QPP, and the depreciation deduction may be subject to recapture as ordinary income under IRC Section 1245.

Does My Acquired Property Still Qualify for the QPP Deduction?

The original use requirement is treated as satisfied for certain acquisitions that were not used in any qualified production activity from January 1, 2021, to May 12, 2025.

The property must not have been used by the taxpayer before acquisition or acquired through related-party transactions.

Written binding contract rules will apply when determining the qualifying acquisition date.

Interplay Between Cost Segregation Analysis and QPP Deduction

While the entire cost of the QPP can be deducted in the year it is placed in service — providing a significant immediate tax benefit — a cost segregation study can be strategically combined with the QPP deduction.

A cost segregation study involves reclassifying certain components of a commercial property — such as fixtures, equipment and specialized electrical/plumbing systems — that are normally depreciated over 39 years (27.5 for residential), into shorter recovery periods (five, seven or 15 years), accelerating depreciation deductions.

Leveraging the cost segregation study, taxpayers can:

Identify Eligible Assets: A cost segregation study can help identify components within a manufacturing or production facility that qualify as QPP, such as specialized machinery, production lines and related infrastructure.
Maximize Benefits:
- By applying the 100% QPP depreciation allowance to these identified assets and then conducting a cost segregation study on the remaining building components, businesses can maximize depreciation deductions on the entire property.
- This ensures that both the QPP and the other elements of the property are depreciated as quickly as possible.
Improve Compliance and Documentation: A detailed cost segregation report, which includes a breakdown of building components and their associated costs and depreciable lives, provides crucial documentation to support the QPP deduction and withstand potential IRS scrutiny.

Benefits of Combining a Cost Segregation Study and QPP Deduction

Taxpayers additionally benefit from the following when combining a cost segregation study and QPP deduction:

Significant Tax Savings: The accelerated depreciation and the QPP deduction, when combined, can lead to substantial reductions in taxable income and tax liabilities, particularly in the initial years of property ownership.
Enhanced Cash Flow: Front-loading depreciation deductions frees up cash flow that can be reinvested in the business, used for further expansions, or used to improve working capital.
Optimized Property Investments: The combined strategy helps businesses realize a higher return on investment for their properties by maximizing tax benefits and improving the overall financial performance of their assets.

How Can Cherry Bekaert Help

To make the most of the 2025 tax reform provisions, businesses should begin planning now to align with key deadlines and maximize available tax incentives relating to the new production property rules if investing in manufacturing-related facilities.

To navigate these changes with confidence and determine a strategy that is optimized for both compliance and cash flow, engage Cherry Bekaert’s Tax Credits & Incentives Advisory (TCIA) professionals. Our tax advisors can help you identify eligible opportunities, model tax impacts and implement a forward-looking plan tailored to your firm’s goals.

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