The One Big Beautiful Bill Act (OBBBA) introduces a game-changing tax incentive for U.S. manufacturers with its Qualified Production Property (QPP) provision, allowing 100% first-year expensing of certain newly constructed or substantially improved manufacturing facilities. This represents a dramatic shift in how manufacturers can plan capital investments, providing an accelerated deduction for nonresidential real estate directly used in production activities, which was previously depreciated over long periods.
What Makes QPP Different from Traditional Bonus Depreciation?
While bonus depreciation has long allowed manufacturers to immediately expense equipment and some improvements, it historically excluded most buildings and real estate. QPP is unique because it applies 100% expensing to nonresidential real property integral to manufacturing or refining processes.
This means manufacturers can now write off the full cost of qualifying buildings placed in service between January 20, 2025, and January 1, 2031. This accelerated deduction greatly improves upfront tax benefits and cash flow compared to the previous 39-year depreciation schedule.
Entity Structure and the Self-Rental Scenario
A critical qualification for QPP is that the same taxpayer must both own the real estate and conduct the manufacturing operation within it. This requirement often poses challenges because many manufacturers separate their real estate holdings from their operating companies for liability, financing, or management reasons.
If the real estate is held by a separate entity—such as an LLC leasing property to the manufacturer—neither entity qualifies for the QPP deduction. The landlord is not considered the operator, and the operator is not the owner for tax purposes, disqualifying the property for 100% expensing under QPP. Instead, the landlord must depreciate the building normally over decades, eliminating the accelerated tax benefits.
This QPP “self-rental” hurdle represents a new planning consideration for entity structuring. As a result, while consolidating real estate ownership and manufacturing operations into a single entity may maximize the immediate tax advantages of QPP, the tax benefits must be carefully evaluated alongside the longstanding strategic and operational advantages of holding real estate in a separate entity.
Potential Relief from Future Guidance
The IRS and Treasury have not yet issued final regulations on this matter. There is hope that additional guidance may provide relief for common ownership situations, potentially allowing related-party landlord/tenant arrangements to qualify for QPP benefits under certain conditions. Until such guidance is released, taxpayers should assume that separate ownership structures typically disqualify the accelerated deduction.
Planning for Maximum Benefit
Manufacturers planning new facility construction or major expansions should:
Review and possibly restructure expansion plans to preserve eligibility for qualification of QPP.
Engage in detailed cost segregation to isolate production-related property from offices or non-production space
Adhere to strict construction and placed-in-service timelines from 2025 through 2031
Maintain comprehensive documentation to substantiate eligibility and election of the QPP deduction
Proper planning now can preserve significant tax savings and improve cash flow during critical expansion phases.
Conclusion
OBBBA’s Qualified Production Property provision offers manufacturers a remarkable opportunity to dramatically increase immediate tax deductions on facility investments. However, realizing this benefit hinges on careful planning. This strict requirement challenges longstanding real estate holding practices but may see some relief through future regulatory guidance.
For manufacturers, early action to evaluate entity structures and construction plans with trusted HBK advisors can unlock substantial tax savings and improve cash flow during crucial expansion phases.
Please contact the Manufacturing Solutions Group to discuss how the QPP provision can optimize your manufacturing capital investments.
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