A New Era of Expensing for Manufacturers: The OBBB Unlocks Bonus Depreciation for Real Property

Manufacturers have long enjoyed tax incentives for investing in tangible personal property, but the One Big Beautiful Bill (OBBB) is rewriting the playbook in a significant way. In a major shift, the OBBB introduces a brand-new category called qualified production property (QPP), which, for the first time, allows non-residential real property to qualify for 100% bonus depreciation. This provision opens up powerful tax-saving opportunities for businesses engaged in qualified production activities and could reshape how manufacturers approach real estate acquisition, construction, and expansion.

What Is QPP and Why Is It a Game Changer for Manufacturers?

QPP is the portion of any non-residential real property that meets the following criteria:

• The property is used by the taxpayer as an integral part of a qualified production activity.
• It is placed in service in the United States or any possession of the United States.
• The original use of the property commences with the taxpayer.
• Construction begins after Jan. 19, 2025, and before Jan. 1, 2029.
• The property is placed in service after July 4, 2025, and prior to Jan. 1, 2031.

Interpreting the Fine Print: Early Takeaways and Key Considerations

Many provisions of the OBBB extend or reinstate rather than create new law. QPP, however, is an exception. Because it is new, additional guidance will be required, but initial observations include:

Qualified Production Activity
OBBB	Qualified production activity means the manufacturing, production, or refining of tangible personal property where substantial transformation occurs (except for food/beverage prepared at a retail establishment where such goods are sold).
Potential Impacts	For many taxpayers, it will be clear that they do (or do not) qualify for this provision. For some companies who operate in the light assembly space, further guidance will be needed to determine whether the “substantial transformation” criteria is met.

 

Lease Arrangements
OBBB	Lessors of nonresidential real property are not eligible for the deduction.
Potential Impacts	The law does not consider self-rental arrangements where the real property is owned by a separate related party. Absent future guidance to the contrary, the self-rental arrangement would not qualify and manufacturers may have to reconsider the structure of potentially applicable real property acquisitions.

 

Acquired Property
OBBB	If a taxpayer acquires property that was not used by any person for a qualified production activity at any time between January 1, 2021, and May 12, 2025, then the property will be treated as satisfying both the original use requirement and the construction commencement date for purposes of QPP.
Potential Impacts	QPP is not only limited to new construction. Purchased properties may qualify so long as they have not been used for qualified production activities during the relevant time period.

 

Eligible Spaces
OBBB	The law specifically excludes certain portions of nonresidential real property from being treated as qualified production property. These excluded areas include: Offices Administrative services Parking facilities Sales activities Research activities Software development or engineering functions Any other functions not directly related to manufacturing, production, or refining of qualified property
Potential Impacts	Noticeably absent from the list is warehouse space. The fact that it is not included seems important. Future guidance will be helpful to better understand whether warehouse space qualifies and if there are important distinctions (e.g., raw material storage vs. finished good storage, finished good warehouse that includes resale items, etc.)  Additionally, should a portion need broken out, how would that be done when the spaces are not clearly separated? How are costs associated with the space going to be separated?  Additional guidance will be needed to determine the allocation of costs associated with excluded areas. The “Any other functions …” language introduces significant interpretive uncertainty. The statute does not define what constitutes “directly related,” nor does it clarify the treatment of supporting or ancillary operations that may be proximate to or essential for the core production process but are not themselves production. Careful review of undefined uses will be necessary.

 

Property Acquisition Date
OBBB	Property is treated as acquired not later than the date on which the taxpayer enters into a written binding contract for the purchase.
Potential Impacts	Taxpayers will need to carefully review agreements to evaluate whether any ongoing or already planned projects will be treated as being acquired after Jan. 19, 2025.

Planning Ahead: What Manufacturers Should Do Now To Maximize the QPP Opportunity

While manufacturers await further guidance on this legislation, companies with ongoing or upcoming planned purchases or expansions should take immediate, including but not limited to:

• Reviewing written, binding contract dates to ensure qualification
• Early-stage cost segregation, which will be critical for identifying and documenting spaces that may qualify as QPP
• Functional use analysis to support qualification
• Self-rental arrangements review and possible restructuring to ensure qualification

With thoughtful planning, QPP has the potential to deliver substantial tax savings and reshape long-term capital investment strategies across the manufacturing sector. For assistance with next steps or to understand how this new provision may impact your operations or upcoming projects, connect with your KSM advisor or fill out the form below.