Accelerated depreciation and industry-based tax incentives are nothing new from a tax policy perspective. First-year bonus depreciation, ranging from thirty percent to 100 percent, has existed in the Federal Tax Code for over twenty years. Congress has also routinely stepped in to provide tax deductions or credits to specific industries. The One Big Beautiful Bill Act (OBBBA) continued this trend by permanently restoring 100 percent bonus depreciation (from forty percent in 2025), expanding Section 179 expensing, and creating a new 100 percent deduction for qualified production property (QPP).1 This latter deduction expands the bonus depreciation concept to incentivize investments in new manufacturing and production facilities. In that respect, the QPP deduction is both a depreciation rule and an industry-aligned tax incentive.
The potential benefit of the QPP deduction is substantial. Investments in manufacturing and production facilities routinely involve tens of millions of dollars or more. Converting the recovery of sizable portions of those investments from thirty-nine-year depreciation into immediate deductions represents potentially millions of dollars in tax savings. Importantly, this deduction is available only to manufacturers and producers, or affiliated entities, that own their facilities and use them as an integral part of qualifying activities. Facility planning is a complex endeavor that takes into account many factors beyond tax benefits. However, the scale of the potential net present value benefits of QPP is significant enough to raise questions about whether businesses should reconsider facility ownership in cases where leasing once made sense.
Why Should I Consider This?
We all know the old saying, “a dollar today is worth more than a dollar tomorrow,” which resonates with most businesses. Large investments, like building a new facility, with the added cost of new equipment, require a considerable outlay of cash. In many cases, the expense has led businesses to lease facilities rather than to borrow money to acquire them. Even though leasing may still involve capital expenditures for equipment, it nonetheless reduces the overall price tag.
But the new QPP deduction adds another dynamic to facility planning by introducing immediate tax deductions when manufacturers acquire facilities. By expanding bonus depreciation, a manufacturer or producer will recognize the economic benefit of that deduction in the year that the facility is placed in service. Although every facility differs, it’s possible that you could spend $50 million on a facility and realize a $40 million tax deduction when placing the facility in service. For a corporation paying combined federal and state income taxes at twenty-five percent, this deduction could result in $10 million of immediate economic benefit. The benefit may be even greater with partnerships or S corporations where the flow-through owners are subjected to higher income tax rates.
Ultimately, the QPP deduction provides businesses with another consideration when building financial models for facility planning. Recognizing immediate economic benefits through tax deductions can reduce the overall financial cost associated with the new facility. However, tax deductions aren’t the only consideration. In this respect, QPP offers an opportunity to revisit plans, consider whether alternative ownership or facility financing structures could make sense, and plan for the future.
What Do I Need to Do to Qualify for the QPP Deduction?
The 100 percent QPP deduction has four core elements. Each impacts business planning and merits careful evaluation. Notably, these requirements are heavily definitional. Fortunately, the Internal Revenue Service and the Treasury Department have published Notice 2026-16 to address many questions about QPP eligibility that emerged following enactment.
Ownership
To be eligible, the taxpayer that owns the QPP must also be the taxpayer engaging in the qualified production activity (see “Use of the Property” section below). The statutory rules make this point explicit by stating that a lessor is ineligible for the QPP deduction. However, Notice 2026-16 provides two exceptions where the lessor is consolidated with the lessee for the purposes of this deduction. The first exception applies when a lessor partnership or S corporation leases qualifying property to a commonly controlled person who uses the property as an integral part of qualifying production activity. For this purpose, “commonly controlled” means fifty percent or more common ownership, as determined under Section 267(b) or Section 707(b). Common ownership must exist for most of the tax year during which the QPP is placed in service, including the last day of that year.2 The second exception applies within a consolidated group of corporations where one member of the group leases qualifying property to another member of the group.
The ownership requirement means that the tax benefits of QPP can’t be priced into a lease agreement with unrelated parties. Ultimately, this rule will force some businesses to choose between their preferred structure and QPP. An anti-abuse rule also precludes taxpayers that are currently leasing property from claiming the deduction after purchasing that property. This “no prior use” rule creates a tax preference for the construction of a new facility rather than the purchase of property that is currently leased.
Property Type
At its core, QPP is defined as new nonresidential real property that is placed in service in the United States and that is used as an integral part of a qualified production activity. Notice 2026-16 clarifies that an expansion of an existing property—likely an addition or improvement—is considered a new unit of property for this purpose. Thus, the concept of an investment in new property encompasses both fully new construction and the expansion of existing facilities.
Not all components of a manufacturing or production facility will qualify. The statute specifically excludes as ineligible property any portion of the facility that is used for offices, administrative services, lodging, parking, sales, research, software development or engineering, or other unrelated functions. This aspect of the rule prioritizes direct production rather than all elements of a manufacturing business. To claim the QPP deduction, the taxpayer must allocate its basis between eligible and ineligible property.
The QPP rules focus on constructing new property, but a limited relaxation of the original use requirement applies to certain purchases of previously used property. Importantly, the purchased property can’t have been used by anyone in a qualified production activity between January 1, 2021, and May 12, 2025. Notice 2026-16 helpfully uses existing regulations under Section 168(k) and Section 179 when determining whether the property is new or used and whether an acquisition of used property qualifies.3 The used property rule opens an opportunity to acquire currently available facilities, albeit with some strings attached. However, the requirements generally favor new construction or the conversion of existing buildings from nonproduction (for example, warehousing) to manufacturing, production, or refining activities.
Use of the Property
The use requirement is a critical factor for qualification given the specific definitional elements and factual detail involved. Namely, the taxpayer must use the property as an integral part of a qualified production activity (QPA). For this purpose, a QPA is the manufacturing, production, or refining of a qualified product. However, a taxpayer’s activities do not constitute manufacturing, production, or refining of a qualified product unless the taxpayer’s activities substantially transform the components or raw materials into the final product. The term “production” is further defined to exclude all activities other than agricultural production and chemical production. In addition, “qualified product” means any tangible personal property that is not a food or beverage prepared in the same building as a retail establishment that sells it.
During the planning stages, it will be important to carefully evaluate the nature of the manufacturing and production activities involved and the manner in which the new property will support them. The use requirement represents both an opportunity and a trap in this respect. Notice 2026-16 helpfully imports the concept of a “unit” of property, which serves as the basis for this analysis. Each building, including its structural components, is considered a single unit of property and will be subjected to the use requirement. As previously mentioned, the expansion of an existing building is also considered a single unit of property. However, an integrated facility, comprising multiple properties located on the same piece or contiguous pieces of land, may also be considered a single unit of property for the use requirement.
The use requirement is not a one-time test based on the year in which the property is placed in service. Rather, the taxpayer claiming QPP has an ongoing obligation to use the property in the QPA. Failure to use the property in the QPA in the ten years after it has been placed in service will result in recapture of the prior depreciation. Depreciation recapture is a common feature when property is sold. The QPP rules go further: they trigger recapture when property ceases to be used in the QPA. This feature operates as an anti-abuse rule to incentivize sustained use of the property rather than strategic deduction generation followed by conversion to another use. Notice 2026-16 does provide some comfort in this respect by relaxing recapture when property is merely idled. Specifically, temporarily taking property out of service for a finite period with the expectation of resuming the QPA in the near future is not considered a change in use.
Timing
Several important dates apply to the QPP deduction. The construction of new, eligible property must begin after January 19, 2025, and before January 1, 2029. Although this beginning-of-construction window ends several years in the future, taxpayers should pay attention as time passes and businesses undertake longer-term planning. For this purpose, Notice 2026-16 employs existing beginning-of-construction rules requiring physical work of a significant nature or to satisfy a cost-based safe harbor. Alternatively, the purchase of eligible used property must also occur within that time window. Finally, eligible property must then be placed in service by the end of 2030.
How QPP Impacts Lease vs. Buy vs. Build Decisions
Businesses consider many factors when planning new facilities or expanding their existing production. Those factors remain relevant after the enactment of the QPP deduction. However, the accelerated timing of this deduction suggests that the conclusion may change in some circumstances. That is most obviously the case where the requirements to qualify involve limited or no change to the lease, buy, or build decision. In other cases where, for example, leasing with unrelated parties is preferred, the prospect of additional tax deductions may not be sufficiently attractive to change plans.
Factors Influencing Facility Planning
Historically, many businesses have viewed leasing favorably when considering flexibility, risk management, and capital preservation. Although leasing property has always meant the loss of some tax depreciation deductions, the long recovery period for capitalized facility costs (usually over thirty-nine years) significantly blunted the impact of those tax attributes. The QPP deduction introduces a new variable by increasing the net present value of tax deductions (immediate deduction versus thirty-nine-year depreciation) that could materially affect the financial comparison. However, “lease versus buy versus build” decisions should never depend on tax benefits alone. In that light, QPP should be treated as an additional input in the analysis, not the sole driver of decisions.
So, what considerations are key to planning? Real estate decisions should still start with operational needs, including but not limited to:
- strategic business planning;
- proximity to customers;
- workforce availability;
- logistics and supply chain requirements;
- zoning and regulatory constraints;
- liability considerations; and
- other federal, state, and local incentives.
Once a business defines its location and operational requirements, then it may begin evaluating its financial plan for acquiring facilities. At that point, the QPP deduction can be evaluated as part of the broader comparison for specific real estate options. In some cases, the deduction may materially sway the outcome; in others, nontax factors may outweigh it.
Ownership Structure Is a Critical Question
Many small and midsized businesses hold real estate in a separate LLC for liability protection, estate planning, liquidity, or tax planning purposes. The QPP rules generally require the manufacturing company to own the building and use it as an integral part of the QPA. Fortunately, Notice 2026-16 expanded these rules to include certain leasing arrangements between commonly owned and controlled entities. The fifty percent common ownership test is relatively easy to satisfy in the context of family ownership. However, not all entities that are considered related from a business perspective will satisfy this definition. Accordingly, planning should begin with a review of the intended ownership structures of the entities in light of Sections 267(b) and 707(b)(1), as referenced in Notice 2026-16.
In some situations, the QPP rules are expected to conflict with the ownership structure preferred by the parties involved. That conflict could be due to property ownership by an unrelated party, insufficient common ownership between the property owner and the manufacturer, or the unattractiveness of a consolidated corporate structure. In any of those cases, the businesses must consider whether the benefits of their preferred ownership structures outweigh the potential QPP deduction. The non-QPP leasing structure still provides the lessee with tax deductions based on lease payments. However, the more substantial accelerated depreciation deductions wouldn’t be available.
Building May Qualify More Easily Than Buying
The QPP rules do provide a limited path for eligibility when a business purchases an existing building. However, the restriction on any prior use in a QPA creates practical challenges for facilities that have been used in manufacturing. That restriction also adds a challenge in documentation where, for example, the current purchaser needs to confirm that no prior owner used the facility in a QPA between January 2021 and May 12, 2025. Substantiating that position may even require documentation about multiple prior owners. But all these restrictions ultimately confirm that the QPP rules favor new construction.
New construction brings its own set of considerations, including construction cost inflation, permitting and entitlement risk, longer time-to-occupancy, financing complexity, and reduced flexibility if operational needs change after the facility is in service. An owner’s representative could help leaders understand the total cost to build in today’s market.
Maximizing Tax Attributes
The purchase or construction of a new facility is commonly accompanied by a cost segregation study to allocate the cost basis among the various forms of property, even without consideration of QPP. Such studies allow for optimization of tax depreciation. That optimization takes on added significance with QPP, given the need to allocate costs across eligible and ineligible property. Helpfully, Notice 2026-16 clarifies that a taxpayer may use any reasonable method for allocating basis for QPP. The notice further provides a not exhaustive list of reasonable methods that includes the use of square footage, cost segregation data, architectural or engineering plans, process diagrams, and construction invoices. This multiplicity of methods provides considerable flexibility when preparing a cost segregation study for QPP.
Planning discussions related to QPP often focus on the question of qualification without a broader discussion about the use of tax attributes. To be clear, it’s important to understand the requirements related to ownership, property type, use of the property, and timing in order to open the door to QPP deductions. However, it’s equally important to understand how costs might be allocated across the property and what alternatives exist for recognizing the benefits of tax attributes. Following the enactment of the OBBBA, businesses have been provided with a menu of depreciation and cost recovery options, which facilitate planning. The deeper cost recovery discussion should consider both where and when facility investment deductions will be claimed.
Looking ahead, key tax planning questions should include the following:
- What depreciation deductions may each entity in the structure claim?
- Will the entity and its owners claiming QPP have sufficient taxable income to offset the deductions, or will a current loss be expected?
- If a loss is generated, what is the anticipated timeline for the use of any loss carryforward?
- Would a shift in property ownership among the parties yield different answers to the above questions?
Even when property isn’t eligible for QPP, that’s not the end of the story. A cost segregation study alone on a manufacturing building could result in anywhere between twenty-five and forty-five percent of the spending being eligible for traditional 100 percent bonus depreciation. Such results are particularly important where the QPP requirements conflict with the intended structure, the business may change the use of the facility in the future, or where deductions are preferred over a longer period.
What Do I Do Now?
The creation of another form of 100 percent depreciation for investments in new manufacturing and production facilities is welcome news for taxpayers considering expansion of their physical operations. The QPP deduction, paired with immediate deductions for equipment and other property, allows for accelerated returns, which offset capital investment costs. However, establishing eligibility for QPP deductions requires consideration of complex rules relating to property ownership, use of the facility, and documentation. Claiming the QPP deduction might not make sense in all cases. As discussed above, the ownership requirement may challenge preferred structures even when businesses consider the net present value of deductions. Additionally, the continued use requirement may make some businesses wary about the potential for recapture if a production line may one day need to be shuttered.
QPP deduction could be a game changer for some manufacturing companies, but owners are cautioned to employ a wider lens and have detailed conversations with their tax and real estate professionals before moving forward.
Stephen Eckert is a partner in Plante Moran’s Chicago office. Jeremy Sompels is a partner in Plante Moran’s Grand Rapids, Michigan, office. Greg VanKirk, partner, and Adam Burgess, principal, are based in Plante Moran Realpoint’s Southfield, Michigan, office.
Endnotes
- See the following documents for details: Public Law 119–21 (HR 1), One, Big, Beautiful Bill Act, enacted July 4, 2025 (see Title VII Finance, which includes Section 70307, “Special Depreciation Allowance for Qualified Production Property”), www.congress.gov/119/plaws/publ21/PLAW-119publ21.pdf; IRS Notice 2026‑16, Interim Guidance on Special Depreciation Allowance for Qualified Production Property (QPP) under Internal Revenue Code Section 168(n), www.irs.gov/pub/irs-drop/n-26-16.pdf; Internal Revenue Service News Release IR‑2026‑06, “Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill,” January 14, 2026, www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill; and 26 USC Section 179, updated amounts in Revenue Procedure 2025-32, www.irs.gov/pub/irs-drop/rp-25-32.pdf.
- For details, see 26 US Code Section 267 (Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers), with definitions in Section 267(b), at www.law.cornell.edu/uscode/text/26/267, and 26 US Code Section 707 (Transactions Between Partner and Partnership), with controlled partnership rules in Section 707(b), at www.law.cornell.edu/uscode/text/26/707.
- See 26 US Code Section 168 (Accelerated Cost Recovery System), in particular subsection 168(n) for “Special Allowance for Qualified Production Property,” at www.law.cornell.edu/uscode/text/26/168, as well as IRS Notice 2026‑11, Interim Guidance on Additional First Year Depreciation Deduction Under Section 168(k), concerning permanent 100 percent bonus depreciation, at www.irs.gov/pub/irs-drop/n-26-11.pdf.
