Qualified Production Property (QPP): A New 100% First-Year Tax Deduction

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Qualified Production Property (QPP)

By Irina Heyer, CPA

Qualified Production Property (QPP) is a special tax category of nonresidential property used directly in domestic manufacturing, production, or refining that allows companies to deduct 100% of the cost in the first year. Internal Revenue Code Section 168(n) allows businesses to immediately deduct 100% of the cost of eligible Qualified Production Property (QPP) in the first year it is placed in service. Enacted under the One Big Beautiful Bill Act (OBBBA), this provision replaces the traditional 39-year depreciation timeline for eligible real estate with immediate full expensing (similar to bonus depreciation).

Eligible taxpayers may elect to deduct 100% of qualifying production-property (QPP) basis in the year the property is placed in service instead of recovering that cost over 39 years. Notice 2026-16 provides interim guidance for the new IRC §168(n) allowance.

The QPP deduction accelerates depreciation rather than creating a permanent exclusion, but the immediate cash-tax benefit may be substantial. Example: A qualifying basis of $2 million could generate a $2 million first-year deduction. At a 21% federal corporate rate, that represents up to approximately $420,000 of current federal tax deferral before considering taxable income limitations, state conformity, or future recapture.

QPP At a Glance

  • Deduction 100% of qualifying adjusted basis in the placed-in-service year
  • Eligible property Qualifying portions of nonresidential real property used integrally in manufacturing, production, or refining
  • Construction window Begins after January 19, 2025, and before January 1, 2029
  • Placed in service After July 4, 2025, and before January 1, 2031
  • Election and risk Timely property designation is required; a change in qualifying use within 10 years may trigger §1245 recapture

To qualify as a QPP asset, the property must meet these criteria:

  • Qualified use: The area must be integral to manufacturing, production, or refining. If qualifying use reaches 95%, an election may treat the entire portion as qualified.
  • Domestic property: The facility must be located in the United States or a U.S. territory.
  • Ownership: Original use generally must begin with the taxpayer, although certain used-property acquisitions may qualify.
  • Return requirement: The taxpayer must timely elect and identify the property; ADS property is excluded.
  • New Construction Requirement: The designation applies to applicable newly constructed buildings and structures and the original use of the property must generally commence with the taxpayer claiming the deduction.

QPP Ineligible Property-The property must not be used substantially for the following:

  • Office and administrative spaces
  • Lodging and parking facilities
  • Areas dedicated to sales activities
  • Spaces used for research, software development, or engineering functions
  • The preparation and sale of food or beverages in the same building as a retail establishment
  • Any other functions that are not directly integral to the manufacturing, production, or refining of tangible personal property

Consider this our QPP tax advice to you. Start by quantifying the opportunity and compare the immediate deduction with regular 39-year depreciation. Then protect the deduction by retaining floor plans, using allocations, contracts, invoices, construction-start evidence, and the placed-in-service date. Next, review the full tax effect. This can be done by considering taxable income, state conformity, ownership structure, interest limitations, and potential recapture before electing. Finally, be sure to file correctly. You must clearly designate each qualifying property on a timely return. Contact us to discuss if your property qualifies for QPP.