What are the eligibility requirements for manufacturers to claim tax benefits on factory construction costs under the One Big Beautiful Bill Act signed by President Trump?
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Under the One Big Beautiful Bill Act (OBBBA), manufacturers can claim significant tax benefits for the construction of factory buildings through a new provision in IRC §168(n), which allows for 100% expensing (immediate deduction) of qualified production property. Below are the detailed eligibility requirements and key conditions for manufacturers to claim these tax benefits:
1. Definition of Qualified Production Property
- Qualified production property is defined as the portion of any nonresidential real property that:
- Is subject to depreciation under IRC §168,
- Is used by the taxpayer as an integral part of a qualified production activity,
- Is placed in service in the United States or any U.S. possession,
- The original use commences with the taxpayer (with certain exceptions for property not previously used in qualified production activities),
- Construction begins after January 19, 2025, and before January 1, 2029,
- Is designated by the taxpayer in the election,
- Is placed in service before January 1, 2031.
2. Qualified Production Activity
- The property must be used as an integral part of a qualified production activity, which is defined as the manufacturing, production, or refining of a qualified product.
- The activity must result in a substantial transformation of the property comprising the product.
- "Production" is further limited to agricultural and chemical production, but the statute distinguishes "manufacturing" and "refining" as separate qualifying activities.
3. Qualified Product
- A qualified product is any tangible personal property, except for food or beverages prepared in the same building as a retail establishment in which it is sold.
4. Exclusions
- The following are excluded from qualified production property:
- Portions of the building used for offices, administrative services, lodging, parking, sales activities, research activities, software development, engineering, or other functions unrelated to manufacturing, production, or refining of tangible personal property.
5. Original Use and Acquisition Rules
- The original use of the property must commence with the taxpayer, unless the property was not used in a qualified production activity by any person between January 1, 2021, and May 12, 2025, and was not previously used by the taxpayer.
- The acquisition must meet the requirements of IRC §179(d)(2) and (3), which generally require that the property is acquired by purchase and not from a related party.
6. Timing Requirements
- Construction must begin after January 19, 2025, and before January 1, 2029.
- Property must be placed in service before January 1, 2031.
- For property acquired (not self-constructed), the acquisition must occur during the same period, and the property must not have been used in a qualified production activity during the specified lookback period.
7. Election Requirement
- The taxpayer must elect to treat the property as qualified production property. The election must specify the nonresidential real property and the portion designated as qualified production property. Once made, the election is generally irrevocable except with IRS consent in extraordinary circumstances.
8. Recapture Rule
- If, within 10 years of being placed in service, the property ceases to be used in a qualified production activity, there is a recapture of the benefit under IRC §1245, treating the property as disposed of at that time.
9. Coordination with Other Provisions
- The property must not be subject to the alternative depreciation system (ADS) under IRC §168(g).
- The provision is elective and treated as a separate class for purposes of other special depreciation allowances.
10. Other Considerations
- The IRS is directed to issue regulations to clarify what constitutes "substantial transformation" and to address changes in use, including after tax-free transfers.
- The deduction is allowed for alternative minimum tax purposes as well.
11. Effective Date
- The provision applies to property placed in service after July 4, 2025 (the date of enactment of the Act).
12.Summary of Key Steps for Eligibility
1. Ensure the property is nonresidential real property used in manufacturing, production, or refining of tangible personal property (excluding certain uses).
2. Begin construction after January 19, 2025, and before January 1, 2029.
3. Place the property in service before January 1, 2031.
4. Make the required election on your tax return.
5. Avoid using the property for excluded purposes or ceasing qualified use within 10 years.
6. Comply with all acquisition and original use requirements, and avoid ADS if possible.
Manufacturers meeting these requirements can claim a 100% immediate deduction for the cost of constructing qualifying factory buildings, providing a powerful incentive for domestic manufacturing investment under the OBBBA.
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