New OBBB Qualified Production Property Deduction

The new tax and budget law, also known as the OBBB, provides significant benefits to U.S. industrial and manufacturing sectors with the new QPP deduction under Section 168(n) and permanent reinstatement of bonus depreciation under Section 168(k). Together, these changes present powerful tools for capital-intensive businesses – especially in manufacturing, refining, and production.

Background

QPP deduction

Section 168(n) allows an election to immediately expense QPP. Section 168(n) is allowed for property for which construction begins after Jan. 19, 2025, and before Jan. 1, 2029, if the property is placed in service after July 4, 2025, and before Jan. 1, 2031. The deduction generally is limited to new or original use property.

QPP is the portion of nonresidential real property used as an integral part of U.S.-based manufacturing, refining, agricultural production, or chemical production of a qualified product. The definition of qualified product excludes food and beverages prepared in the same building as a retail establishment in which the property is sold. Also excluded is building property related to spaces such as offices, administrative services, lodging, parking, sales activities, research activities, software development and engineering activities, and other functions unrelated to the manufacturing, production, or refining of tangible personal property. QPP does not include property subject to the alternative depreciation system of Section 168(g).

Crowe observation

To identify Section 168(n) exclusions, taxpayers will need to segregate building spaces when setting up the new assets for tax depreciation purposes.

The QPP deduction is not available to lessors of otherwise eligible property. If the property’s use changes to an ineligible use within a 10-year period, recapture rules will apply.

The following example illustrates the benefit of Section 168(n):

A C corporation invests $10 million in QPP. The time value of money benefit of the Section 168(n) deduction versus depreciation over the normal 39-year tax life of the property is 13.5% or $1.35 million assuming a 21% tax rate and a 7% present value rate.

Bonus depreciation

Since 2001, Section 168(k) bonus depreciation has incentivized companies across industries that make capital expenditures on property like furniture, fixtures, machinery, equipment, and land improvements. Under the Tax Cuts and Jobs Act of 2017 (TCJA), bonus depreciation allowed 100% immediate expensing for eligible property. However, for eligible property acquired and placed in service after Dec. 31, 2022, the Section 168(k) deduction percentage phases down as follows:

2023: 80%
2024: 60%
2025: 40%
2026: 20%
2027: 0%

The OBBB reinstates 100% bonus depreciation permanently for qualified property acquired after Jan. 19, 2025, though for the first tax year after Jan. 19, 2025, taxpayers can elect a reduced bonus depreciation percentage of 40% (60% in the case of certain plants). Taxpayers can elect out of bonus depreciation on a year-by-year and class-by-class basis.

The following types of property are eligible for bonus depreciation under Section 168(k):

• Most tangible property with a Modified Accelerated Cost Recovery System (MACRS) recovery period of 20 years or less
• Computer software under Section 167(f)(1)
• Water utility property
• Qualified film, television, and live theatrical productions
• Certain specified plants

Notably excluded from this list are residential and nonresidential building property.

Comparing Section 168(k) and Section 168(n)

In some situations, Section 168(k) can be more beneficial than Section 168(n). In others, the reverse is true.

The differences between Section 168(k) and Section 168(n) are summarized in the table below.

QPP state tax implications

Many states do not automatically conform to the current IRC. In those states, taxpayers will be required to depreciate QPP over the states’ recovery period for buildings (often 39 years) while still being allowed shorter state recovery periods for five-, seven-, and 15-year property. Therefore, a taxpayer that skips the cost segregation of shorter-lived property in a new manufacturing facility and accounts for it as QPP in its entirety could risk losing accelerated depreciation benefits at the state level due to this conformity issue.

Looking ahead

Guidance is needed for taxpayers to implement Section 168(n), although given the significant amount of guidance needed to implement the OBBB, it is unclear when such guidance will be issued. In the meantime, taxpayers that started construction of manufacturing facilities or that are considering building new manufacturing facilities should consult their tax adviser to model the benefits available under Section 168(n) and Section 168(k) to evaluate the best options for cost recovery with respect to these investments.