Ending the 39-Year Drag: How the QPP Deduction Makes New U.S. Factories Tax-Free

For decades, the 39-year drag has been the primary headwind facing American industrial expansion. Under standard U.S. tax code, a commercial building is depreciated over nearly four decades, forcing manufacturers to wait a lifetime to fully recover the capital invested in their physical plants. This slow recovery process often made domestic expansion less attractive than leasing or offshore manufacturing.

Everything changed on July 4, 2025, with the signing of the One Big Beautiful Bill Act (OBBBA). Among its most revolutionary provisions is the creation of the Qualified Production Property (QPP) deduction under the new Section 168(n) of the Internal Revenue Code. This provision effectively ends the 39-year depreciation era for new factories, allowing developers and manufacturers to deduct 100% of their construction costs in a single year.

This is more than a tax break; it is a fundamental shift in the economics of domestic production. For successful business owners and industrial developers, the QPP deduction transforms a massive capital expenditure into an immediate, tax-shielding asset.

What is Qualified Production Property (QPP)?

The QPP deduction is a specialized 100% first-year depreciation allowance specifically designed for the physical backbone of American industry. Unlike standard bonus depreciation, which typically applies to machinery or short-life equipment, QPP applies to the nonresidential real property itself, the actual building that houses the production.

To qualify for this immediate expense, the property must be integral to a qualified production activity. According to the IRS summary of OBBBA provisions, this includes facilities used for manufacturing, production, or refining of tangible personal property. The activity must result in a substantial transformation of the materials, separating true manufacturing from simple assembly or packaging.

This new category effectively bridges the gap between the building and the machinery. Historically, only the machinery could be expensed quickly, now, the very walls and floors that support that machinery are eligible for the same accelerated treatment, provided they meet the rigorous integral use test.

The Strategic Window: Timing and Eligibility

The QPP deduction is not a permanent fixture of the tax code, but rather a high-impact stimulus with a clear execution window. To take advantage of this tax-free factory construction, developers must adhere to a strict legislative timeline:

• Construction Start: Physical work on the facility must commence after January 19, 2025, and before January 1, 2029.
• Placed in Service: The facility must be completed and operational before January 1, 2031.
• Original Use: Generally, the original use of the property must begin with the taxpayer, though certain exceptions exist for used facilities that have not been used for production in the last several years.

This timeframe encourages immediate reinvestment. Developers who have been sitting on the sidelines due to high interest rates now have a powerful counter-balance: the ability to wipe out their federal tax liability for the year their new facility opens. As noted in the analysis from RSM US on QPP growth, this incentive is designed to lower the after-tax cost of capital-intensive projects, making large-scale modernization financially viable.

Navigating the Non-Qualified Exclusions

One of the most complex aspects of the QPP deduction is that it rarely applies to 100% of a building’s square footage. The law is very specific about what does not count as Qualified Production Property. The portion of a facility dedicated to office space, administrative services, sales, research and development, or employee lodging is excluded from the 100% deduction.

For example, if a developer builds a $100 million Headquarters and Manufacturing Center where 70% of the space is the factory floor and 30% is executive office space, only the 70% qualifies for the QPP deduction. The remaining 30% must be depreciated over the traditional 39-year schedule.

This mixed-use reality makes a professional cost segregation study mandatory. Engineers and tax strategists must meticulously map the facility to allocate costs between QPP, machinery (bonus depreciation), and standard real property. Failing to bifurcate these costs correctly can lead to significant audit risk and the potential for recapture penalties down the line.

The Ownership Trap: Lessors vs. Operators

A critical hurdle for real estate developers is the ownership and use requirement. Under Section 168(n), the taxpayer claiming the QPP deduction must generally be the same entity that is conducting the qualified production activity. The OBBBA explicitly states that a lessor (a landlord who builds a factory and leases it to a manufacturer) is ineligible for the QPP deduction.

This requirement will disrupt many traditional “Build-to-Suit” arrangements. For a developer to capture the tax benefit, they may need to structure the deal as a joint venture with the manufacturer or use a specific operating company/property company (OpCo/PropCo) structure that satisfies the IRS requirements for common ownership and active use.

Strategic planning here is paramount. If the structure is not aligned from day one, the 100% deduction could be lost, reverting the building to a 39-year asset and significantly damaging the project’s Internal Rate of Return (IRR).

Recapture and the 10-Year Commitment

The QPP deduction comes with an ongoing use obligation. To keep the tax savings, the facility must remain a qualified production environment for at least ten years after being placed in service. If the building is converted into a warehouse, a data center, or an office complex during that decade, the IRS will recapture the prior depreciation as ordinary income.

This recapture rule acts as a safeguard to ensure the tax code is fueling actual industrial capacity rather than just real estate speculation. Developers must underwrite their projects with a long-term view, ensuring that the facility’s design and location are conducive to a decade of continuous manufacturing or refining activity.

Impact on Cash Flow and Reinvestment

The mathematical impact of the QPP deduction on cash flow is staggering. On a $50 million qualifying factory, a developer in the 37% tax bracket would realize $18.5 million in immediate tax savings. In a high-interest-rate environment, this upfront cash is often more valuable than the long-term rental income, as it can be used to pay down construction debt or fund the equity for the next phase of expansion.

By removing the 39-year drag, the OBBBA has essentially created a tax-free environment for the physical construction of American industry. This allows manufacturers to retool faster, respond to supply chain shifts more aggressively, and compete globally from a position of fiscal strength.

Find Your Expert Industrial Tax Strategist

The QPP deduction is arguably the most powerful tool for industrial developers in the modern era, but its complexity ranging from integral use tests to ownership structure requirements leaves no room for error. Navigating Section 168(n) requires a specialist who understands both the nuances of manufacturing and the intricacies of real estate tax law. The Top Tax Planners Directory connects you with the nation’s most elite tax strategists, each vetted for their expertise in OBBBA compliance and cost segregation. Whether you are breaking ground on a new facility or reconfiguring an existing industrial portfolio, our verified professionals can help you maximize your 100% deductions and safeguard your ROI. Visit the Top Tax Planners Directory today to secure a qualified tax professional and ensure your next project is optimized for the new era of American manufacturing.