QPP Provision

To qualify, the property must be used by the taxpayer as an integral part of a qualified production activity; a lessee’s use of the property doesn’t count, so Op-Co/Prop-Co lease structures will not qualify unless an exception is provided through future guidance. That may sound like an easy definition, but there are nuances to understand:

INTEGRAL PART

The law does not define “integral part.” It may simply mean that the property must house other property used as an integral part of a qualifying activity. Under prior law, property was considered to be an integral part of an activity if it was used directly in the activity and was essential to the completeness of the activity.

QUALIFIED PRODUCTION

“A qualified production” activity is a manufacturing, production, or refining process that results in a substantial transformation of a qualified product. Some key points to consider:

• Production doesn’t include activities other than agricultural or chemical production.
• Qualified product means any tangible personal property but doesn’t include food or beverages prepared in the same building as a retail establishment in which such property is sold, so restaurants and other food/beverage shops do not qualify.
• “Substantial transformation” to be defined in future guidance, but there is a potential safe harbor: if conversion costs (direct labor and factory burden) are equal to or greater than 20% of total COGS, the activity would be deemed substantial.
• QPP doesn’t include any portion of the property used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other functions unrelated to the manufacturing, production, or refining of tangible personal property. Therefore, cost segregation studies will remain critical for identifying qualifying assets and ensuring compliance.
• Property subject to the alternative depreciation system is also ineligible.

ACQUISITION AND IN-SERVICE TIMING REQUIREMENTS

And the property must satisfy certain acquisition & placed-in-service requirements:

• New Property: construction must begin after January 19, 2025, and before January 1, 2029.
  • To establish when construction begins, taxpayers should look to established tests until further guidance is issued:
    1. Physical Work Test – based on substantive construction activities, not costs. Excludes planning, design, financing, or any other preliminary activities.
    2. 5% (or 10%) Safe Harbor – construction begins when ≥5% (or 10%) of eligible costs are incurred if continuous construction efforts are made.
       • 5% test: Notice 2018-59, §5 – all costs properly included in the depreciable basis of the property are considered except for land and any property not integral to the production activity.
       • 10% test: 1.168(k)-2(b)(5)(iv)(B)(2) – excludes the cost of any land and preliminary activities.
• Existing Property: Acquired after January 19, 2025, and before January 1, 2029.
  • Acquisition date is subject to “written binding contract” rules.
  • The property cannot have been used in a qualified production activity by anyone from January 1, 2021, through May 12, 2025, and it cannot have been used by the taxpayer at any time prior to the acquisition, so leased facilities are ineligible if acquired by the lessee.
  • Acquisition must satisfy §179(d)(2)(A)-(C) & (d)(3):
    1. 2(A): Property not acquired from a related party under Secs. 267 or 707(b)
    2. 2(B): Property not acquired by one component member of a controlled group from another component member of the same controlled group
    3. 2(C): Basis of the acquirer not determined by reference to the adj. basis of the seller or under Sec. 1014(a) (property acquired from a decedent)
    4. 3: Cost of the property does not include any basis determined by reference to the basis of other property held at any time by the acquirer (ex., 1031x exchange basis)
• Both new and existing properties must be placed in service after July 4, 2025, and before January 1, 2031.
  • Treasury may extend placed-in-service deadlines for delays due to acts of God.

• QPP benefits are subject to a 10-year recapture period. If a property ceases to be used by the taxpayer in a qualified production activity, the taxpayer must recognize ordinary income equal to the QPP expensing election.
• Upon disposition, QPP is treated as Sec. 1245 property, not real property.

• QPP expensing offers significant acceleration of tax benefits for manufacturers and producers investing in new or repurposed facilities.
• Key uncertainties around the definition of “integral part,” “substantial transformation,” and treatment of landlord/tenant structures may limit its reach, so stay tuned for future guidance.
• Taxpayers must carefully track construction start dates, acquisition rules, and operational use to preserve eligibility.
• Cost segregation studies will remain critical for identifying qualifying assets and ensuring compliance.

The QPP election is a powerful new tool for manufacturers, refiners, and producers. By accelerating deductions, it reduces effective tax rates and improves return on investment—but only if taxpayers navigate the complex rules and carefully document eligibility.

Remember, the burden of proof always falls on the taxpayer. That’s why choosing a partner with in-house tax experts to help you with your Cost Segregation Studies makes all the difference. At Scarpello Consulting, our team stays ahead of the ever-changing tax landscape to ensure you not only maximize the benefits of the tax code, but do so with confidence and compliance.