Did You Know? A Deeper Dive into the OBBA’s Impact on Qualified Production Property
In our previous analysis of the One Big Beautiful Bill Act (OBBA), we provided a high-level overview of its broad implications for businesses. Today, we focus on a provision with monumental significance for the manufacturing, production, and construction sectors: the introduction of 100% expensing for Qualified Production Property (QPP).
To qualify for 100% expensing on new facilities before the provision expires, manufacturers and production companies must begin the process immediately. The timelines for approvals, planning, and construction mean that projects need to start now to take full advantage of this opportunity.
This specific component, established under a new section of the tax code, marks a fundamental shift from long-standing depreciation schedules and presents a substantial, time-sensitive opportunity for strategic financial planning.
Additionally, while most are familiar with bonus depreciation, it’s important to note that the recent law initiated a phase-out. The benefit remains available, however, until its expiration in 2031, so businesses still have time to capitalize on it.
This article offers an in-depth examination of QPP, its qualifications, and the actionable steps businesses must consider to leverage these powerful incentives.
Understanding Qualified Production Property (QPP)
The OBBA created a new section, often cited as Section 168(n), which permits the full and immediate expensing of newly constructed non-residential real property integral to manufacturing or production. This is a significant departure from prior tax law, which mandated that such real property be depreciated over a 39-year period. This applies to construction of property acquired, constructed and placed in service after January 19, 2025 through January 1, 2029.
Key components of this provision include:
Immediate Real Property Expensing: Businesses can now deduct the entire cost of qualifying new construction in the year the property is placed in service. This accelerates tax savings and can dramatically improve cash flow, freeing up capital for reinvestment, expansion, or debt reduction.
Eligible Entities: This benefit is primarily aimed at manufacturers and producers. It may also extend to certain distributors with integrated production or refining activities. The legislation incentivizes the construction of new facilities dedicated to these core industrial operations.
Synergy for Construction and Manufacturing: The QPP provision creates a powerful incentive for manufacturers to initiate new construction projects. This, in turn, generates significant opportunities for construction firms, whose clients are now highly motivated to build new facilities to capitalize on this immediate tax benefit.
OBBA's Impact Across Key Industries: Concerns and Actions
The 100% expensing opportunity under OBBA presents different advantages and potential actions for each industry segment. Below, we outline sector-specific impacts and recommend actionable next steps:
Construction
Primary Focus: Bonus Depreciation, Section 179, and full expensing for machinery, equipment, and qualifying new facilities.
Key Concern: How to leverage the new expensing rules to purchase equipment.
Action: Evaluate current and planned capital projects, particularly new construction or large equipment acquisitions, to determine if these investments qualify for immediate expensing. Engage with your CPA to structure transactions for maximum tax benefit.
Manufacturing
Primary Focus: 100% expensing for:
Newly constructed production facilities
New equipment purchases
Immediate Research and Development credits
Key Concern: Integrating expensing opportunities into annual tax strategy for product development and facility upgrades.
Action: Review all planned upgrades and expansions to existing facilities. Prioritize investments that can be expedited to qualify within the OBBA window and consider a cost segregation study to document deductible components accurately.
By taking targeted action based on industry-specific considerations, organizations can better position themselves to capitalize on OBBA’s QPP expensing provision. Early assessment and coordination with tax professionals are essential to ensure all qualifying projects and expenditures are appropriately structured and documented.
The Temporary Window for Action
It is critical to understand that the 100% expensing provision for QPP is temporary. To qualify, construction must commence by a specified date, and the property must be placed in service by a subsequent deadline, currently January 1, 2029. This limited timeframe necessitates immediate and strategic planning. Businesses considering capital expenditures on new facilities must act decisively to ensure their projects meet the statutory deadlines. Proactive consultation with a certified public accounting firm is essential to navigate timing requirements and maximize financial returns. Kellogg and Kellogg, PC provides the expertise necessary to manage these complex regulatory standards.
The Crucial Role of Cost Segregation Studies
Maximizing the deduction for Qualified Production Property requires a detailed and accurate classification of assets. Not all components of a new facility will qualify. For example, administrative office spaces or other non-production areas are typically excluded and must still be depreciated under standard schedules.
A Cost Segregation Study is the mechanism for distinguishing between qualifying QPP (e.g., the production floor, specialized electrical and plumbing systems integral to manufacturing) and non-qualifying property. This engineering-based analysis provides the necessary documentation to substantiate the 100% expense deduction and ensure compliance during an IRS audit. A cost segregation study will be required to support your deduction.
Kellogg and Kellogg Deep Dive for Fort Worth Industry Leaders
1. The Hidden Cost of Misclassifying Qualified Production Property (QPP)
The Trap: Under the OBBA, not all industrial space is created equal. The IRS defines Qualified Production Property specifically as portions of a building that are an integral part of a "qualified production activity"—defined as the manufacturing, production, or refining of tangible personal property that results in a substantial transformation.
The Risk: If you treat your entire facility as QPP, you invite a high-stakes audit. The OBBA explicitly excludes space used for:
Executive and administrative offices
Sales and marketing departments
Research and Development (R&D) laboratories
Employee lodging or parking structures
Owner-Occupied Only: The QPP deduction is generally only available to the owner who also conducts the production activity. Leased properties often do not qualify for the lessor.
Timeline: Construction must begin after Jan 19, 2025, and be placed in service by Jan 1, 2031.
The Financial Impact: Misclassification can lead to the "Recapture Trap." If the IRS determines a portion of your 100% deduction was actually 39-year office space, you will owe the back taxes plus interest and potential penalties. Even worse, if a facility ceases to be used for QPP within 10 years, the OBBA triggers a full recapture of the tax benefit. Proper upfront classification is the only way to "audit-proof" your expansion.
2. Cost Segregation: The Non-Negotiable Step for Immediate Expensing
The Strategy: While the OBBA’s QPP provision is revolutionary, it doesn't eliminate the need for a Cost Segregation Study—it makes it more complex and more rewarding. A study is now required to peel the building apart into three distinct buckets:
Personal Property (5 & 7-Year): Machinery, specialized wiring, and removable equipment (Permanent 100% Bonus).
Qualified Production Property (QPP): The actual manufacturing "shell," foundations, and integral infrastructure (Temporary 100% Expensing through 2030).
Non-Qualifying Real Property (39-Year): The front office, break rooms, and lobby.
Why It's Essential: Without an engineering-based study, the default move is to lump everything into the building's basis. By segregating, you ensure that the "Substantial Transformation" areas are maximizing the QPP 100% write-off, while your 5-year assets are captured under the permanent bonus depreciation rules. In 2026, a cost segregation study is no longer a "luxury" tax play; it is the primary documentation the IRS expects to see to substantiate a QPP claim.
3. Beyond the Building: What Else Qualifies for 100% Write-Off?
The Expanded Scope: The OBBA didn’t just fix the "factory floor" problem. Several other high-value capital assets now fall under the permanent or expanded 100% expensing rules that Fort Worth leaders often overlook:
Qualified Improvement Property (QIP): Interior build-outs for non-residential buildings (like upgrading a warehouse you already own) remain eligible for 100% bonus depreciation.
Site Improvements (15-Year): Parking lot paving, fencing, and specialized outdoor lighting are now permanently 100% deductible in the first year.
Heavy Vehicles: Business vehicles with a GVWR over 6,000 lbs (common in industrial fleets) qualify for the full 100% deduction in Year 1, avoiding the "luxury auto caps" of smaller vehicles.
Domestic R&D Software: If you are developing proprietary software for your production line right here in Texas, the OBBA has restored the ability to expense those costs immediately rather than amortizing them over five years.
Strategic Action Required
The introduction of 100% expensing for Qualified Production Property under the OBBA is one of the most significant tax incentives for the industrial sector in recent history. It offers a direct path to enhanced cash flow and accelerated ROI on major capital investments. However, the temporary nature of this provision demands immediate attention.
To determine if your planned construction project qualifies and to develop a strategy that aligns with the legislative deadlines, we recommend a thorough consultation. Contact Kellogg and Kellogg, PC today to schedule an analysis of your capital expenditure plans and ensure your business is positioned to capitalize on this opportunity.
Our team specializes in transforming complex legislative changes into clear, actionable strategies, helping you unlock valuable financial advantages.
All content shared here is for reference and general information only. It is NOT tax, legal, or financial advice. Decisions about tax and financial matters require personalized professional attention. Readers should contact Kellogg and Kellogg or their current tax advisor for specific guidance.