Overview of the New Law (OBBBA 2025)
Find the very short version of this summary here: 100% Deduction for Manufacturing Buildings: How to Qualify Under IRC §168(n)
The One Big, Beautiful Bill Act (OBBBA), signed July 4, 2025, introduced a powerful tax incentive to spur U.S. manufacturing. The law created a “qualified production property” (QPP) deduction – essentially a 100% immediate depreciation for the cost of new manufacturing, production, or refining facilities placed in service during a limited window[1][2]. Ordinarily, buildings must be depreciated over 39 years, but under new IRC §168(n), taxpayers can deduct the full cost of a qualifying production facility in the year it is placed in service[2]. This goes beyond traditional expensing provisions (like §179) by allowing full write-offs of the building structure itself (not just equipment or improvements), provided specific requirements are met[3]. Paired with the now-permanent 100% bonus depreciation for equipment and expanded §179 expensing, this provision enables immediate deduction of most costs for new domestic manufacturing operations[1][3].
Qualified Production Property (QPP) Deduction – Key Requirements and Conditions
To claim the 100% QPP deduction on a facility, a number of strict conditions apply:
Ownership by the Operator: The taxpayer claiming the deduction must both own the property and use it in a qualified production activity (QPA). In other words, the owner must be the one conducting the manufacturing/production in the facility. The statute explicitly disqualifies lessors – a property landlord cannot take the QPP deduction simply because the tenant is a manufacturer[4][5]. Only an owner-operator of the facility qualifies. (If a lessee incurs costs to build or improve a production facility for its own use, those improvements owned by the lessee could qualify under these rules, but a passive owner leasing out a building does not qualify.)
Qualified Use (Manufacturing/Production Only): The property must be used as an integral part of a “qualified production activity” (QPA), meaning it’s used in the manufacturing, production, or refining of tangible products[6]. The law requires a “substantial transformation” of raw materials or components into a new product, ensuring that only bona fide manufacturing/refining operations qualify[6][7]. (For example, turning steel into machinery or grain into ethanol would qualify, whereas minimal assembly or repackaging might not.) The term “production” in this context is narrowly defined to include agricultural and chemical production only, and a “qualified product” excludes things like food or beverages prepared at a retail establishment (e.g. a restaurant’s on-site cooking doesn’t count)[7]. In short, the facility’s primary function must be making tangible goods through substantial processing.
Property Type and Excluded Areas: The deduction is only for nonresidential real property (commercial/industrial buildings) used for production, and only for the portions of the facility used directly in the qualified production activity[2]. Any portion of the building used for other purposes is ineligible and must be depreciated under normal rules[2]. The statute specifically excludes areas like offices, administrative or sales areas, research and development labs, software development or engineering departments, conference rooms, employee lodging or cafeterias, parking facilities, etc. from the immediate write-off[8][5]. Taxpayers will need to allocate the building’s cost between qualifying manufacturing space and non-qualifying space. For example, if part of a new building is devoted to offices or if an owner-operator only uses 50% of a facility for manufacturing (renting out the rest), only the manufacturing portion can get the 100% deduction[2]. A reasonable cost segregation or allocation is required to carve out those non-production areas[9]. (No formal engineering certification is required to identify qualifying areas, but maintaining documentation – floor plans, cost breakdowns, etc. – will be important to substantiate the portion of the property that was dedicated to manufacturing use[9].)
New Construction or Qualifying Purchase Timing: This incentive is aimed at new investments made during 2025–2028. For a facility to qualify, construction must begin after January 19, 2025 and before January 1, 2029 (effectively mid-2025 through 2028), and the property must be placed in service by December 31, 2030[10][11]. The deduction primarily applies to newly constructed facilities (original use beginning with the taxpayer). However, there is a provision for purchased used facilities to qualify in limited cases: the property cannot have been used by anyone in a qualified production activity between Jan 1, 2021 and May 12, 2025, and of course the buyer must not have previously used that property[12][13]. This rule prevents a taxpayer from simply buying an existing operational factory and expensing it – unless the facility had been out of service (or not used for production) in recent years. In practice, if you acquire an older building to convert into a manufacturing plant, you’ll need to ensure it wasn’t being used as such during the restricted look-back period to claim QPP treatment.
Election Required: Claiming the 100% deduction is optional – taxpayers must elect to treat a property as qualified production property on their tax return[14][15]. If no election is made, the asset will follow normal depreciation (or regular bonus depreciation if otherwise eligible). The election to use §168(n) is irrevocable (the law allows revocation only with Treasury’s consent in extraordinary cases)[14][15]. This means businesses should carefully evaluate the pros and cons before electing. For example, if a company already has tax losses or credits carryforwards, an immediate extra deduction might not provide a current benefit (and could simply increase a net operating loss that might be subject to limitations). Similarly, corporate taxpayers subject to the 15% corporate alternative minimum tax should consider whether expensing a building would actually yield savings[15]. In essence, elect when it truly provides value – and once made, the election cannot be undone later simply because circumstances change.
10-Year Usage Requirement (Recapture): The incentive comes with a long-term use requirement. The taxpayer is expected to continue using the facility for qualified production for at least 10 years after placing it in service[16]. If the property is taken out of service or converted to a non-qualifying use within that 10-year window, the IRS can recapture (claw back) the previously claimed depreciation benefit[16]. In practice, if a company elected §168(n) and expensed a factory but then, say, sells the building, stops manufacturing in it, or repurposes it for warehousing or offices only a few years later, it will likely have to recapture some or all of the deduction as income (essentially as if excess depreciation were retroactively disallowed). This recapture rule discourages businesses from taking the deduction and then immediately flipping the property or exiting the manufacturing activity. Taxpayers should be mindful of this 10-year commitment – a short-term use or quick sale could trigger a significant tax hit down the road.
Differences from Section 179 Expensing
While the new QPP deduction may sound similar to a §179 deduction (both allow immediate expensing of assets), there are important differences and interactions:
Code Section & Cap: The QPP deduction is authorized by IRC §168(n) (as a form of “special depreciation allowance”), not by IRC §179. Section 179 expensing remains available for machinery, equipment, certain improvements, and other personal property, but §179 has annual dollar limits (e.g. about $1.25 million for 2025, indexed) and a phase-out for very large investments. By contrast, §168(n) has no specific dollar cap – a company could potentially expense a $50 million factory under QPP if it qualifies, which would far exceed §179’s limits.
Income Limitation: Critically, §179 deductions are limited by the taxpayer’s trade/business income – you cannot use §179 to create or increase a tax loss; any excess §179 is carried forward. The QPP deduction has no such income limitation written into the statute. It functions like bonus depreciation: a 100% depreciation deduction that can indeed produce a net loss for the year[3]. In other words, you do not need taxable income in the current year to claim the QPP write-off (unlike §179). This makes it potentially more powerful, but it also means normal loss-utilization rules come into play (e.g. net operating loss rules, which for post-TCJA NOLs generally limit use to 80% of future income each year, and carryforward indefinitely).
Property Eligible: Section 179 generally applies to personal property (equipment, vehicles, computers, etc.) and certain qualifying improvements to real property, but not to the building’s core structure itself. By contrast, the QPP deduction squarely targets the building (real property) used in manufacturing, which was not eligible for §179 expensing (except via some limited categories of improvements). In effect, §168(n) fills a gap by allowing immediate expensing of what would normally be 39-year real property – but only for manufacturing/production facilities, not for other real estate. (For example, you still cannot immediately expense an office building or a retail store under these rules – those remain ineligible for bonus depreciation as well – but you can fully expense a new factory or refinery, subject to the QPP criteria[2].)
Automatic vs. Elective: §179 is elective (you choose which assets and how much to expense, up to the limit), and bonus depreciation (§168(k)) is generally automatic (100% bonus applies by default unless you elect out by asset class). The new §168(n) QPP deduction is also elective – it must be affirmatively claimed for each qualifying property[17]. This gives taxpayers flexibility: one could choose not to elect QPP for a particular building (for example, if they prefer regular depreciation for a steady deduction stream or to avoid a large loss). By contrast, if an asset qualifies for bonus depreciation, it will get 100% write-off by default under current law unless you opt out. Keep in mind you can combine strategies: a manufacturer might use §168(n) to expense a new factory building, §168(k) bonus to expense the equipment inside, and §179 for any qualifying pickups (like certain software or vehicles), maximizing immediate deductions across the board.
Considerations for Pass-Through Entities (S Corporations, Partnerships, LLCs)
Pass-through businesses can benefit from the QPP deduction, but special care is needed in planning ownership and understanding loss limitations:
Entity Must Be Owner-Operator: For a pass-through to claim the deduction, the entity itself must own the facility and conduct the manufacturing activity. The rule disqualifying lessors means you cannot split the operation into two entities (one owning the real estate, the other running the business) and still take the §168(n) deduction[4][5]. This is a common structure for many small businesses (to isolate real estate liability or for state tax reasons), but it will forfeit the QPP benefit. Example: If an S-corp operates a factory but the building is held in a separate LLC that leases it to the S-corp, no QPP deduction is allowed – the S-corp doesn’t own the building, and the LLC isn’t itself doing qualified manufacturing. To use the incentive, the business may need to own its facility directly or through a disregarded entity. (Using a single-member LLC owned by the S-corp or by the individual owner can be a solution: the LLC would be ignored for tax purposes, effectively making the S-corp or individual the owner-operator of the property[18]. Similarly, a partnership that wants the deduction should consider owning the real estate within the partnership or in a wholly-owned LLC, rather than in a separate parallel entity.) Restructuring might be warranted for new acquisitions – otherwise, if a manufacturing company sticks with a separate property holding company, it will have to fall back on normal 39-year depreciation for the building.
Flow-Through of Deductions: When a qualifying pass-through entity (partnership or S-corp) elects the §168(n) deduction, the full depreciation expense flows through to the owners as part of the ordinary business loss or income on Schedule K-1. There is no requirement that the entity have positive income to pass through the deduction (unlike the pre-limit at the entity level for §179). This means the pass-through can report a tax loss due to the huge depreciation deduction, which the owners then receive on their tax returns. However, owners must have sufficient basis and meet other tax-law requirements to actually use that loss.
Basis and At-Risk Limitations: An owner’s ability to deduct a pass-through loss is subject to basis limitations (and at-risk rules). If an S-corporation shareholder, for instance, only invested a small amount of capital and the S-corp financed most of the building with bank debt, the shareholder may not have enough stock or debt basis to absorb the large loss passed through in year one. (Unlike partnership partners, S-corp shareholders generally do not get basis for corporate-level borrowing unless they personally lent funds to the S-corp or guaranteed debt and certain conditions are met.) In such cases, the excess loss would be suspended at the shareholder level until they increase their basis (e.g. by contributing capital or the company earning profits in future years). Partners in an LLC/partnership do get basis credit for their share of entity debt, so they often can utilize more of the loss – but if the debt is non-recourse (or not at-risk), at-risk rules could still limit deduction. In short, insufficient basis or at-risk amounts can postpone the benefit of the big deduction, especially for S-corp owners financing a large project with external debt.
Passive Activity Considerations: The QPP deduction doesn’t override the passive activity loss (PAL) rules. If an investor in the pass-through is not materially participating in the business (i.e. a passive owner), the pass-through loss (including any created by the QPP write-off) will be classified as a passive loss for that owner. Passive losses can only offset passive income, so a passive investor might not get to use the deduction immediately if they have no other passive income – the loss would carry forward until they have passive income or sell their interest. On the other hand, an active owner (materially participating in the manufacturing business) can use the loss against other active or portfolio income, subject to any other limitations. There is no special “active participation” requirement unique to §168(n) – it relies on the usual PAL rules. So, practically, to fully leverage the deduction in the current year, owners should be active in the business or have other passive income to absorb any losses.
State Tax Impact for Pass-Throughs: Pass-through owners should also be aware of state tax treatment. Many states decouple from federal bonus depreciation or limit expensing. For instance, Oregon (where you are located) generally starts its tax calculations with federal taxable income and thus would include corporate-level §168(n) deductions[19]. However, Oregon (for personal income tax on pass-through income) historically has required adding back federal bonus depreciation and then taking depreciation over a longer period[20]. It’s not yet fully clear if Oregon will treat §168(n) similarly to bonus depreciation for pass-through owners – but there’s a possibility that, for Oregon personal tax, you might not get the full immediate benefit and would instead have to spread the deduction out (at least until the legislature updates conformity). In any case, for multi-state operations or state filings, confirm each state’s conformity: some may disallow this new super-depreciation and require their own depreciation schedules, which affects cash tax outcomes for owners.
Outstanding Questions and IRS Guidance Status
Because §168(n) is brand new, there are open questions and forthcoming guidance to monitor:
Definition Clarifications: Key terms like “integral part of a qualified production activity,” “manufacturing,” and “substantial transformation” are not yet fleshed out in regulations. The statute directs Treasury to issue guidance consistent with principles from prior code sections (such as §954(d) for substantial transformation tests)[21]. We expect regulations or IRS guidance to define what level of activity counts as manufacturing vs. mere assembly, which industries qualify, how to treat mixed-use facilities, etc. Until then, tax advisors are drawing on analogies to older rules (like the former Domestic Production Activities Deduction definitions, or the §45X credit for advanced manufacturing)[22]. This interim approach can be tricky – interpretations can vary widely and may not perfectly align with congressional intent[22]. The lack of clarity means taxpayers should document their positions carefully (e.g. why they consider their activity “manufacturing” under a reasonable definition) and perhaps be somewhat conservative until official guidance is issued. Notably, the IRS has included §168(n) on its 2025–2026 Priority Guidance Plan, so we anticipate proposed regulations or notices to be released in the near future addressing many of these issues[23].
Election and Reporting Mechanics: As of early 2026, the IRS has not released a dedicated form for the QPP deduction. It’s likely that the election will be made on the tax return via Form 4562 (Depreciation and Amortization) or a similar mechanism. Tax software might include a checkbox or election statement for §168(n). Keep an eye on 2025 tax form instructions – the first returns claiming this will be for assets placed in service in late 2025. The election being irrevocable means one should double-check the proper procedure to make it. If the IRS requires a statement attachment, failing to include it could mean missing the election. Also, future guidance should explain how to handle the recapture if it occurs (we may see a new form or schedule for recapturing QPP deductions if a property’s use falls out of compliance before 10 years, similar to how there are forms for recapture of certain credits). For now, the practical step is to maintain detailed records so you can demonstrate eligibility and track the property’s use over time.
Cost Allocation for Mixed-Use Facilities: One practical question is how to allocate costs for a facility that has both qualifying and non-qualifying uses (which is common – e.g., a factory building might include some office space, or a production company might rent out a portion of its warehouse to another business). The law says any portion not used for qualified production is excluded[2], but it doesn’t prescribe a method for allocation. Presumably, taxpayers can use reasonable methods (square footage, cost segregation studies segregating building systems, etc.)[9]. We anticipate that forthcoming IRS guidance will address this, possibly by requiring or allowing a cost segregation study to identify qualifying components vs. non-qualifying ones[9]. In the meantime, engaging a professional cost segregation firm for a new facility is wise – not only can it help maximize your overall depreciation (by identifying parts of the building like machinery, fixtures, land improvements that might qualify for regular 100% bonus depreciation), but it will be essential in separating out the office portions or other disqualified areas so you don’t inadvertently over-claim the QPP deduction.
Strategic Planning: Taxpayers considering using this incentive should plan ahead of time. Since the construction start and placed-in-service dates are critical, documentation of when a project begins will matter (e.g., keep records of ground-breaking or building permits after Jan 19, 2025). Also, because the ownership structure must be set up correctly to qualify, businesses should coordinate with legal and tax advisors when structuring the acquisition or construction of a new facility. It may be beneficial, for instance, to combine the real estate and operating entity or to use a disregarded entity for the real estate, rather than a separate partnership or S-corp. These changes are easier to implement before purchasing or building the property. Additionally, consider the long-term business plan: if there’s a chance you might sell or spin off the real estate or discontinue manufacturing at that site within 10 years, weigh the risk of recapture when deciding to elect the deduction.
Conclusion
The new 100% deduction for qualified production property is a significant tax break designed to encourage domestic manufacturing investments. In essence, it allows a company to build or buy a manufacturing facility and write off the entire cost in Year 1, rather than depreciating it over decades[2]. This can substantially lower taxable income (or even generate losses) in the short term, freeing up cash that can be reinvested in the business. Compared to familiar expensing provisions like bonus depreciation and §179, the QPP deduction extends the tax code’s generosity to the very buildings where production takes place – something previously not fully deductible upfront[2][3].
That said, taking advantage of this incentive requires meeting strict criteria and careful planning. A company must own the facility and actively use it for manufacturing – owner-landlord arrangements won’t qualify[4]. Non-production portions of the property must be carved out, and the investment must occur within the specified timeframe. Pass-through businesses can benefit greatly, but owners should be mindful of basis and passive loss considerations when a huge deduction flows through. There is also an element of commitment: the 10-year use recapture rule means this isn’t meant for a quick flip or short-term use of a facility[16].
In summary, for a manufacturing or production business that plans appropriately, §168(n) offers a tremendous opportunity to accelerate tax deductions. It essentially puts building costs on par with equipment in terms of immediate expensing[1]. As we move into 2026 and beyond, tax professionals are awaiting further IRS guidance to clarify the finer points[22], but the core provisions are known. Companies (and their CPAs) should familiarize themselves with these rules now, so they can structure acquisitions or construction projects to qualify and maximize tax savings. With the proper approach, the tax code now rewards manufacturers who invest in U.S. production capacity by allowing them to write off the “big, beautiful” factory as soon as it’s up and running.
Sources: Recent IRS and tax advisory publications on the OBBBA and §168(n) including Plante Moran analysis[4][9], Baker Tilly guidance[14][5], K&L Gates law alert[2][23], and IRS/Treasury announcements. These detail the qualified production property rules and their implementation as summarized above.
[1] [3] [4] [8] [9] [10] [12] [16] [18] OBBB boosts U.S. manufacturing through new qualified production property deduction | Our Insights | Plante Moran
https://www.plantemoran.com/explore-our-thinking/insight/2025/11/obbb-boosts-us-manufacturing
[2] [7] [11] [13] [15] [23] OBBBA Offers Important Incentive to Encourage Manufacturing, Production, and Refining in the United States | HUB | K&L Gates
[5] [6] [14] [17] [21] [22] Many questions surround the new qualified property expensing benefit in IRC 168(n) | Baker Tilly
https://www.bakertilly.com/insights/questions-surrounding-new-benefits-in-irc-168n
[19] [20] oregonbusinessindustry.comhttps://oregonbusinessindustry.com/wp-content/uploads/Oregon-Conformity-Memo_Business-Provisions_FINAL_9.10.2025.pdf
