QIP Tax Deduction Changes: What Manufacturing CFOs Need to Know

                                       

By: Laurie Smith

Partner, Tax

Key Takeaways

• The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, restored 100% bonus depreciation for Qualified Improvement Property (QIP) acquired after January 19, 2025, and separately created a new 100% expensing provision for Qualified Production Property (QPP) under IRC Section 168(n). These are two distinct provisions with different rules, different qualifying property, and different compliance requirements.
• QPP is the more significant provision for manufacturing CFOs planning capital investments: it allows 100% first-year expensing for qualifying production facility real property, including structural components such as walls, roofing, HVAC, and plumbing in eligible production areas, that have traditionally been depreciated over 39 years.
• The QPP election is not automatic. It must be made on a timely-filed federal return for the year in which the property is placed in service. Construction must begin after January 19, 2025, and before January 1, 2029. The property must be placed in service after July 4, 2025, and before January 1, 2031.

For most of the last four decades, a manufacturer who built a new production facility faced the same tax math: capitalize the building, depreciate it over 39 years, and watch the tax benefit trickle in long after the cash went out the door. The OBBBA changed that equation, and for CFOs planning facility investments in 2026 and beyond, understanding precisely what changed and what the IRS now expects from taxpayers claiming it is not optional.

QIP and QPP Are Not the Same Thing

Before getting into the mechanics, the distinction in terminology matters. Manufacturing CFOs will encounter both “QIP” and “QPP” in conversations about the OBBBA’s depreciation provisions, and the two are frequently conflated. They should not be.

Qualified Improvement Property (QIP) is an established concept under IRC Section 168(k). QIP covers interior improvements to nonresidential buildings already placed in service, excluding enlargements, elevators and escalators, and improvements to the internal structural framework. Under the OBBBA and IRS Notice 2026-11, QIP acquired after January 19, 2025, is eligible for 100% bonus depreciation, restoring the full immediate expensing that had phased down under prior law.

Qualified Production Property (QPP) is an entirely new provision, created under IRC Section 168(n) by the OBBBA. QPP applies to nonresidential real property, meaning the building itself and its structural components, used as an integral part of a qualified production activity. Unlike QIP, which addresses improvements to existing interiors, QPP covers the building’s full depreciable basis allocated to eligible production areas. This is the provision that allows a manufacturer to expense the structural cost of a new factory in year one rather than over 39 years.

For manufacturing CFOs, QPP is the more consequential development. The ability to immediately deduct the qualifying basis of a production facility, not just its interior improvements, represents a fundamentally different magnitude of tax benefit. 

What Qualifies as QPP: The Production Activity Standard

QPP applies to nonresidential real property located in the United States that the taxpayer uses as an integral part of a qualified production activity. Per IRS Notice 2026-16, issued February 20, 2026, a qualified production activity is a manufacturing, chemical production, agricultural production, or refining activity that results in the substantial transformation of property into a distinct final product.

The substantial transformation standard is specific and consequential. Packaging, labeling, minor assembly, and distribution do not meet it. The activity must materially convert raw materials or inputs into a final product that is distinct from the inputs. Ownership of the final product is generally not determinative in evaluating whether an activity constitutes a qualified production activity.

Space usage determines eligibility at the building level. Only areas used as an integral part of production qualify. Offices, administrative space, research and development areas, finished-goods storage, and lodging are explicitly excluded, even when they are in the same building as qualifying production floors. Raw material receiving, storage, and preparation may qualify when they are essential to completing the production process.

The IRS has stated that employee headcount is not an acceptable allocation method. Acceptable methods under Notice 2026-16 include cost segregation studies, which remain the most defensible approach for establishing basis allocation between eligible and ineligible space.

The 95% De Minimis Rule and Integrated Facilities

Two planning provisions can expand the eligible basis for manufacturers with facilities largely dedicated to production. If 95% or more of a facility’s physical space is used for qualified production activities, the taxpayer may elect to treat 100% of the building as QPP, eliminating the need to allocate out the small amount of ineligible space. Separately, multiple buildings operating on the same or contiguous land may be treated as a single integrated facility, thereby extending QPP treatment to structures that directly support production, such as raw material handling buildings, when they function as part of a unified operation.

The Election, the Timing Requirements, and What “Irrevocable” Actually Means

The QPP deduction is an election, not a default. It must be made by attaching the required statement to a timely-filed federal return, including extensions, for the tax year in which the property is placed in service. That statement must include the property’s address, a description of the eligible production areas, and the specific dollar amount of basis being designated as QPP.

Once made, the election is generally irrevocable without IRS consent. This has direct implications for planning: partial elections are permitted, and in situations where the manufacturer has net operating losses, significant credit carryforwards, or uncertainty about the facility’s future use, a partial election may preserve future optionality while still capturing meaningful near-term tax benefits.

The timing requirements are statutory and not subject to administrative extension. Construction must begin after January 19, 2025, and before January 1, 2029. The property must be placed in service after July 4, 2025, and before January 1, 2031. Property subject to a written binding contract entered into before January 20, 2025, does not qualify. Substantiating construction start dates requires retaining contracts, payment applications, and building permits, not an afterthought but a documentation requirement that should be built into project management from day one.

The 10-Year Recapture Rule: The Compliance Obligation That Outlasts the Project

The QPP election delivers its full benefit in year one. The compliance obligation runs for a decade. If property that has been designated as QPP ceases to be used in a qualified production activity at any time during the 10-year period beginning on the placed-in-service date, the taxpayer must recognize the excess depreciation previously claimed over what standard 39-year MACRS depreciation would have allowed as ordinary income in the year the disqualifying change occurs.

Partial changes in use result in partial recapture. Temporary shutdowns and conversions to different qualifying production activities generally do not trigger recapture. Conversions to office space, finished-goods storage, or distribution use do.

The practical implication for manufacturing CFOs is that QPP elections should be made in the context of a realistic 10-year operational outlook, not solely based on the current-year tax position. A facility expansion that earns a large first-year deduction but gets repurposed as a distribution center in year four has a recapture liability that can significantly erode the original benefit. Modeling that scenario before making the election is sound planning, not excessive caution.

A Provision This Significant Requires Planning Before Ground Is Broken

QPP is not a provision that can be optimized after the fact. The basis allocation methodology, the election scope, the construction timeline documentation, and the 10-year use plan must be established before the project closes, not when the return is due.

Wiss works with manufacturing companies to identify, document, and support QPP positions through engineering-based basis allocation studies, election planning coordinated with the broader tax picture, and ongoing compliance monitoring through the recapture period. If your company is planning a facility build, expansion, or modernization in 2026 or 2027, contact Wiss to evaluate the QPP opportunity before breaking ground.

This article reflects the provisions of the OBBBA and interim guidance in IRS Notice 2026-16, issued February 20, 2026. Taxpayers may rely on Notice 2026-16 until proposed regulations are issued. This article is general in nature and does not constitute tax advice for any specific situation. Consult a qualified tax advisor regarding your company’s particular circumstances.

Previous"SpaceX’s $60 Billion Cursor Deal: What It Signals for AI"