Did the One Big Beautiful Bill Act introduce any special tax benefits for manufacturers investing in new factory buildings?
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Yes, the One Big Beautiful Bill Act (OBBBA) introduced a significant new tax benefit specifically for manufacturers and other businesses investing in new factory buildings and certain production facilities. This benefit is provided through a new "special depreciation allowance for qualified production property" under section 168(n) of the Internal Revenue Code, as amended by the OBBBA.
1. Key Features of the New Benefit
1. 100% Immediate Expensing for Qualified Production Property- Taxpayers can elect to deduct 100% of the adjusted basis of "qualified production property" in the year the property is placed in service, rather than depreciating the cost over the usual 39-year period for nonresidential real property.- This is a temporary provision: it applies to property for which construction begins after January 19, 2025, and before January 1, 2029, and which is placed in service before January 1, 2031. The Secretary of the Treasury may extend the placed-in-service deadline in cases of delays caused by acts of God.
2. Definition of Qualified Production Property- The property must be a portion of nonresidential real property (i.e., factory buildings or similar structures) that is: - Used as an integral part of a "qualified production activity" (manufacturing, production, or refining of tangible personal property, with a requirement for "substantial transformation" of the property), - Placed in service in the United States or a U.S. possession, - The original use must commence with the taxpayer (with special rules for certain acquired property), - Designated by the taxpayer in the election, - Excludes portions of buildings used for offices, administration, lodging, parking, sales, research, software development, engineering, or other non-production functions.
3. Exclusions and Limitations- The provision does not apply to property subject to the alternative depreciation system (e.g., property used predominantly outside the U.S., tax-exempt use property, etc.).- Only the portion of the building used directly in qualified production activities is eligible; mixed-use buildings must allocate costs accordingly.- The law requires that the taxpayer's activities result in a "substantial transformation" of the property comprising the product, a term that is not further defined in the statute and will require regulatory guidance.
4. Recapture Rules- If, within 10 years of being placed in service, the property ceases to be used in qualified production activities, the taxpayer must recapture the benefit as ordinary income under section 1245.
5. Election and Irrevocability- The taxpayer must make an election to apply this provision, specifying the property and the portion of the property to which the election applies. Once made, the election is generally irrevocable except in extraordinary circumstances.
2. Policy Rationale and Context
This provision is designed to encourage investment in U.S.-based manufacturing and production facilities by allowing immediate cost recovery for the construction of new factory buildings and similar production structures. Traditionally, such buildings were depreciated over 39 years, which created a tax disincentive for long-lived investments. By allowing immediate expensing, the OBBBA aims to boost domestic manufacturing and related activities.
3. Comparison to Other Expensing Provisions
- The OBBBA also made permanent 100% bonus depreciation for most short-lived business assets (machinery, equipment, etc.) under section 168(k), but the new section 168(n) is unique in that it applies to certain real property (factory buildings) used in production, which was not previously eligible for full expensing.
4. Anticipated Guidance and Complexity
- The statute leaves several terms undefined (e.g., "substantial transformation," "qualified production activity"), and practitioners expect the IRS and Treasury to issue regulations to clarify eligibility, allocation for mixed-use buildings, and other technical details.
In summary, the OBBBA introduced a special, elective 100% immediate expensing provision for new factory buildings and similar production facilities, available for a limited window for property constructed and placed in service between 2025 and 2030. This is a significant new tax benefit for manufacturers and other businesses investing in U.S. production infrastructure.
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