Breaking Down the OBBBA: Qualified Production Property and Its Major Implications

The One Big Beautiful Bill Act (OBBBA) is known for making 100 percent bonus depreciation permanent for tangible personal property, such as machinery and equipment. That change grabbed headlines. But tucked into OBBBA is another powerful—and less publicized—opportunity: Qualified Production Property (QPP).   

QPP was introduced under the new §168(n) and allows certain non-residential real estate to qualify for bonus depreciation. Instead of depreciating eligible facilities over 39 years, businesses can immediately write them off. For manufacturers, chemical producers, and agricultural production, this is potentially game-changing. 

QPP is a high-impact provision that could reshape how businesses plan expansions, structure real estate ownership, and finance growth. But it also comes with tight rules, unanswered questions, and serious recapture risks. 

What Counts as a Qualified Production Activity? 

For property to qualify, businesses must use it in a Qualified Production Activity (QPA), defined as the manufacturing, production, or refining of tangible personal property that results in a substantial transformation. 

Examples (from existing Internal Revenue Service [IRS] guidance in other areas) include: 

• Converting wood pulp into paper 

• Machining steel rods into bolts and screws 

• Processing fish into canned fish 

Limitations: 

• Only agriculture and chemical production are included 

• Restaurants are explicitly excluded 

The IRS may narrowly apply the “substantial transformation” standard. Without further IRS guidance, it is unclear whether activities such as general assembly, distribution, storage, or packaging will qualify. 

Real Estate Ownership and Leasing Complications 

The new law states that the taxpayer must use the property in a QPA. A tenant engaging in a QPA does not qualify the landlord to claim the property as QPP. 

This raises questions for common structures in which operating companies lease from related real estate entities (“self-rentals”). Do existing §469 grouping elections (for passive activities) allow real estate to qualify as QPP? The IRS has not announced anything yet, but the answer could determine whether QPP delivers for many privately held businesses. 

Until the IRS releases additional guidance, businesses should model both outcomes. Unless and until the IRS explicitly approves it, assume that landlord-owned property likely won’t qualify for QPP treatment.  

What’s Out: Non-Production Space 

Not all space within a facility qualifies. QPP excludes areas used for: 

• Offices or administrative functions
• Lodging, sales, research or software development
• Parking
• Engineering

Storage space for raw materials or finished goods is a gray area awaiting IRS clarification. 

Expect significant allocation challenges. Businesses will need a defensible method to carve out QPP vs. non-QPP square footage, which may require engineering studies or cost-segregation analysis. 

Timing Rules and Construction Windows 

Unlike the 100 percent bonus depreciation, which is now permanent, QPP is temporary. It is available as follows: 

• Facilities must be placed in service after July 4, 2025, and before January 1, 2031. 
• Construction must begin after January 19, 2025, and before January 1, 2029. 
• Property must be “original use,” with a limited exception for facilities not used in production between January 1, 2021, and May 12, 2025 (the so-called “tainted period”). 
• Significant renovation of an existing production facility within these timeframes may qualify it as QPP, if the renovation is integral to the production activity. Further guidance from the IRS is needed to define what does and does not qualify. 

Developers and manufacturers considering expansion should act quickly. Missing these windows could mean a 39-year straight-line recovery period, instead of an immediate deduction. 

Recapture Rules 

If a business ceases to use a QPP facility in a QPA within 10 years of placing the facility in service, recapture applies. In that case, the IRS treats the property as disposed under §1245, triggering ordinary income on the excess depreciation claimed. This recapture event would result in a significant tax obligation for the business and its owners. Businesses should therefore constantly monitor these rules and keep them at the top of their mind when making decisions.  

These recapture provisions are unusually strict. Businesses should consider long-term operational stability before pursuing QPP. IRS guidance is needed on treatment for possible tax-free transfers involving QPP facilities (e.g., like-kind exchanges). 

State Conformity: Another Layer of Complexity 

Most states already decouple from §168(k) bonus depreciation. QPP falls under the new §168(n), and only a handful of states currently conform. Legislative updates are expected. 

Businesses should monitor the status of any new legislation at the state level. Multi-state operators must model both layers. Eligible businesses might need to obtain two cost segregation studies for new facilities: one at the federal level supporting QPP-eligible property and another for state purposes that covers regular depreciation.  

Why This Matters 

The QPP provision provides a significant tax incentive for real estate development by allowing businesses to depreciate a building in one year, instead of over 39 years. Assuming a 30 percent tax rate and a 7 percent interest rate, this new QPP depreciation provision can reduce the after-tax cost of a building by approximately 20 percent. As we turn the clock on 2025 and these provisions take effect, proactive tax planning will be key. Contact your Sikich tax advisor or visit our OBBBA resource hub to learn more about how QPP could impact your business. 

About Our Authors

Jim Brandenburg, CPA, MST, possesses extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions, and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.

Glen Birnbaum, CPA, provides expert accounting and tax advisory services for a range of entities, including those in the agriculture, manufacturing and construction industries. He excels in delivering tax and succession planning services to his clients, who value his commitment to strengthening their businesses.

Tom Bayer, CPA, CExP, has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He has deep experience providing a range of accounting, tax, and business advisory services to commercial clients across industries.