What is "qualified production property" for purposes of section 168(n)?
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“Qualified production property” (QPP) for purposes of section 168(n), as enacted by the One Big Beautiful Bill Act (OBBBA), is a new category of property eligible for 100% immediate expensing (bonus depreciation) if certain requirements are met. The statutory and interpretive details are as follows:
1. Statutory Definition and Requirements
1. Type of Property- QPP must be nonresidential real property (i.e., property that would otherwise be depreciated over 39 years under MACRS).
2. Use Requirement- The property must be used by the taxpayer as an integral part of a qualified production activity. This means the property must be directly involved in the manufacturing, production, or refining of tangible personal property.
3. Qualified Production Activity- A “qualified production activity” is defined as the manufacturing, production, or refining of a qualified product. The statute further clarifies: - “Qualified product” means any tangible personal property, except for food or beverages prepared in the same building as a retail establishment in which such property is sold. - “Production” is limited to agricultural production and chemical production; other activities do not qualify. - The activity must result in a substantial transformation of the property comprising the product.
4. Location- The property must be placed in service in the United States or a U.S. possession.
5. Timing of Construction and Use- Construction must begin after January 19, 2025, and before January 1, 2029.- The property must be placed in service before January 1, 2031.- The original use of the property must commence with the taxpayer (i.e., the property must not have been previously used by the taxpayer or in a qualified production activity between January 1, 2021, and May 12, 2025, unless acquired in a qualifying manner).
6. Election Requirement- The taxpayer must elect to treat the property as QPP. This is done by specifying the property on the tax return or as otherwise prescribed by the Secretary.
7. Exclusions- Leased property: Property with respect to which the taxpayer is a lessor does not qualify, even if the lessee uses it in a qualified production activity.- Non-qualifying use: Portions of a building used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering, or other functions unrelated to qualified production activities are excluded from QPP treatment. Taxpayers must allocate costs to exclude these portions.
8. Special Rule for Acquired Property- There is an exception to the original use requirement for acquired property: If the property was not used in a qualified production activity between January 1, 2021, and May 12, 2025, and was never previously used by the taxpayer, it may still qualify if acquired under a written binding contract between January 19, 2025, and January 1, 2029.
9. Recapture Rule- If the property ceases to be used in a qualified production activity within 10 years of being placed in service, the taxpayer must recapture the benefit of the expensing.
2. Summary Table of Key Requirements
3. Legal Nuances and Considerations
- Cost Segregation: Taxpayers must carefully identify and allocate costs to qualifying and non-qualifying portions of a facility, especially if the building houses both production and non-production functions.
- Substantial Transformation: The statute requires that the production activity result in a substantial transformation of the property comprising the product, which may require further IRS guidance for interpretation.
- Documentation: Taxpayers should maintain detailed records to substantiate the use and allocation of property as QPP, especially in mixed-use facilities.
- State Conformity: Not all states may conform to the federal QPP expensing rules, so state tax treatment should be separately analyzed.
4. Conclusion
In summary, “qualified production property” under section 168(n) is nonresidential real property in the U.S. (or a U.S. possession) that is newly constructed or acquired and used by the taxpayer as an integral part of a manufacturing, production, or refining activity involving tangible personal property (other than food/beverage prepared and sold in the same building), with strict requirements on timing, use, and exclusions for non-production functions and leased property. The taxpayer must make an election to treat the property as QPP, and a 10-year recapture rule applies if the property ceases to be used in a qualified production activity.
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