New 100% First-Year Deduction for Qualified Production Property: What Businesses Should Be Doing Now

A major new tax incentive is available to manufacturers, producers, refiners, and certain agricultural and chemical businesses. Under the Working Families Tax Cuts Act, also known as the One Big Beautiful Bill Act, IRC §168(n) allows taxpayers to elect a 100% first-year depreciation deduction for qualified production property (QPP). This effectively permits an immediate write-off of qualifying building costs that historically would have been depreciated over 39 years.

What Is Qualified Production Property?

To qualify as QPP, property generally must be:

• Nonresidential real property used as an integral part of a qualified production activity
• Located in the United States or a U.S. territory
• Have construction beginning after January 19, 2025, and before January 1, 2029
• Be placed in service between July 4, 2025, and January 1, 2031

Property is an integral part of a qualified production activity if the manufacturing, production, or refining activity occurs within the physical space of that property. In other words, the building, or a portion of it, must directly support or house the qualifying production process.

Congress designed this provision to encourage domestic production by effectively lowering the after-tax cost of building or expanding U.S. production capacity. The financial benefit can be significant for qualifying taxpayers.

Why This Matters for Businesses

A manufacturing facility that previously would have generated deductions over 39 years may now generate a substantial deduction immediately. Accelerating depreciation can significantly improve cash flow, reduce current tax liabilities, and improve project returns.

Historically, businesses often relied on cost segregation studies to accelerate depreciation on portions of a facility. Rather than moving costs from a 39-year life to a five-, seven-, or 15-year life, taxpayers may be able to immediately expense qualifying portions of the building itself. For many projects, the benefit could be substantially larger than cost segregation alone.

The rules primarily benefit manufacturing, refining, agricultural production, chemical production, and related industrial activities that substantially transform tangible personal property. Businesses with current or anticipated capital projects should begin evaluating eligibility well before construction is completed.

Start Planning Construction Projects Now

Businesses considering new plants, expansions, production-line additions, utility upgrades, and major facility improvements should first evaluate whether projects can be structured to meet the construction and placed-in-service requirements. The guidance indicates that certain improvements and additions to existing facilities may qualify independently.

We recommend the following steps and considerations:

• Understand what does not qualify. Office space, administrative services, lodging, parking, sales activities, research activities, software development, engineering, and storage of finished products are generally excluded. Careful facility planning and basis allocation are critical.
• Consider the 95% de minimis rule. If at least 95% of a facility’s physical space satisfies the production-use requirement, taxpayers may elect to treat the entire property as qualifying.
• Ensure you meet the original-use requirement. This is one of the key eligibility criteria for QPP. To qualify for the 100% first-year deduction, the property’s original use must commence with the taxpayer. Generally, original use begins when the property is first placed in service for its intended use by any taxpayer. Newly constructed property will generally satisfy this requirement because no one has previously used it.
• Evaluate previously used property. Certain acquired used industrial properties may qualify if statutory requirements regarding prior use and related-party restrictions are satisfied.
• Be careful of the 10-year recapture rule. If property ceases to be used in a qualified production activity within 10 years and is converted to another productive use, recapture rules may apply, potentially generating ordinary income.
• Review IRS Notice 2026-16, which provides additional guidance on QPP. Normally, under 168(n), the owner-taxpayer is required to use the building directly. However, for split real estate and operating companies, related-party leases can still qualify if common control ownership thresholds are met.

Action Steps

After evaluating QPP eligibility, businesses should develop an implementation plan that includes the following:

1. Identify potentially qualifying projects.
2. Confirm the timing requirements.
3. Document the eligible and ineligible space.
4. Perform cost segregation and basis allocation analyses.
5. Model projected tax savings.
6. Monitor recapture exposure.
7. Prepare required election statements.

Completing these steps can help businesses identify QPP opportunities, plan for compliance, and maximize available deductions.

Planning for QPP Benefits

The qualified production property provisions create a potentially significant tax opportunity for manufacturers and producers. Businesses considering capital investments should evaluate these rules now and coordinate planning with their tax advisors to maximize benefits.

CRI’s tax professionals can help your business assess eligibility and plan for QPP. Contact us to get started.