Can Your Manufacturing Facility Qualify to Be Expensed Immediately?

For decades, manufacturers constructing or acquiring production facilities have generally been required to recover those costs over 39 years through depreciation. There are, and were, opportunities to then accelerate depreciation on certain components of the building through a cost segregation study.

That changed with the enactment of the One Big Beautiful Bill Act (OBBBA).The legislation introduced a new category of property known as qualified production property (QPP) that may allow manufacturers to immediately deduct 100% of the cost of certain qualifying production facilities rather than depreciating those costs over nearly four decades. For many companies, the benefit can result in millions of dollars of accelerated tax deductions and significantly improved cash flow.

What Is Qualified Production Property?

Qualified production property generally includes nonresidential real property that is used as part of a qualified production activity, such as:

• Manufacturing
• Processing
• Refining
• Fabrication
• Assembly of tangible goods

If the property meets the statutory requirements, taxpayers may be eligible to claim a first-year deduction for the entire qualifying building cost.

This represents one of the most significant federal tax incentives currently available to domestic manufacturers.

An Important Opportunity for Existing Buildings

One of the most surprising aspects of the legislation is that eligibility is not limited to newly constructed facilities. In certain situations, a taxpayer acquiring an existing building can be treated as the "original user" of that property and still qualify for the deduction.

To qualify, the acquisition generally must occur between January 19, 2025, and December 31, 2028, and several additional requirements must be met.

Key Requirements for Acquired Manufacturing Facilities

For a previously owned building to qualify, companies should carefully evaluate whether:

1. The Building Was Previously Used for Manufacturing

   The facility generally is ineligible if it was used in a qualified production activity during a specified lookback period outlined in the statute.
   
   If the facility was not used for QPP previously, this requirement can create planning opportunities for manufacturers acquiring former warehouse, distribution, office, retail, or other commercial properties and converting them into production facilities.

2. The Building Was Not Previously Used by the Taxpayer

   The acquiring company generally must not have used the property before purchasing it.

3. The Transaction Is Not Between Related Parties

   The acquisition must satisfy rules designed to prevent taxpayers from obtaining the deduction through transfers among related entities. Transactions involving related-party sellers, controlled groups, or carryover basis arrangements generally require additional scrutiny.

4. The Property Will Be Used in Qualified Production Activities

   The facility must ultimately be used in qualifying production operations. Companies should carefully document the manufacturing activities occurring within the property and maintain support demonstrating the building's role in the production process.

Practical Considerations

Businesses considering this incentive should maintain documentation supporting:

• Prior use history of the facility
• Nature of manufacturing activities performed at the site
• Purchase agreements and acquisition documents
• Related-party analyses
• Basis allocations between land and building
• Internal management representations regarding qualification requirements

Because land is not depreciable, only the qualifying building portion of the acquisition cost may be eligible for immediate expense.

Potential Impact

Consider a manufacturer is acquiring an existing industrial facility for several million dollars. Under traditional depreciation rules, the building component would generally be recovered over 39 years. If the facility qualifies as QPP, the company may be able to deduct the entire qualifying building basis in the year the property is placed in service, creating a substantial acceleration of tax benefits and improving near-term cash flow. For capital-intensive manufacturers investing in domestic production capacity, the difference can be significant.

What Manufacturers Should Do Now

The new QPP provisions create a unique window of opportunity for businesses acquiring or developing production facilities through the end of 2028.

Manufacturers contemplating facility expansions, relocations, acquisitions, or conversions of existing industrial properties should evaluate potential eligibility early in the planning process. A building that may not appear to qualify at first glance could potentially generate a sizable immediate tax deduction if the statutory requirements are satisfied.

As with many new tax provisions, documentation and factual support will be critical. Companies should work closely with their tax advisors to evaluate eligibility and preserve support for the deduction before claiming the benefit. Citrin Cooperman’s Manufacturing and Distribution tax professionals provide specialized guidance on QPP eligibility, tax credits, and other strategic tax planning opportunities. Contact our team today to discuss the valuable tax savings opportunities available to your company throughout the lifecycle of your operations.