Depreciation

100% Deduction for Manufacturing Buildings: How to Qualify Under IRC §168(n)

Neil Langlois Business Taxes, Real Estate , , , , , , 1 Comment
100% Deduction for Manufacturing Buildings: How to Qualify Under IRC §168(n)

New Manufacturing Tax Deduction Could Be a Game-Changer — If You Structure It Right

Find the long version of this summary here: Executive Summary: 100% Deduction for New Manufacturing Facilities (Qualified Production Property)

From January 1, 2025 through December 31, 2028, there’s a powerful federal tax deduction on the table for businesses that build or buy manufacturing property — but you have to structure it right to qualify.

The headline: If you construct or purchase a building and use it for actual manufacturing, production, or refining, you may be able to deduct 100% of the building cost in the year it’s placed in service. This goes far beyond machines and equipment — this is about the building itself.

Under the new IRC §168(n) provision — often referred to as the Main Street Manufacturing deduction or Qualified Production Property (QPP) expensing — businesses can fully expense the cost of eligible real property placed in service during that four-year window. But the rules are tight, and the IRS will be watching.

No More “HoldCo leases to OpCo”

That common setup where your holding company owns the building and leases it to your operating business? That structure kills the deduction. The law is clear: landlords don’t qualify, even if the tenant is your own company. To get this right, the same taxpayer needs to be on both sides of the activity.

Even if you’re using a disregarded LLC, having a formal lease in place could still trigger the lessor disqualification. If there’s rent on paper, the IRS could treat it as a landlord arrangement regardless of how it’s taxed. That means your real estate holding company likely won’t qualify unless it’s completely ignored for tax purposes and there’s no lease in place.

Use It Right — Or Give It Back

There’s a 10-year recapture rule. If you stop manufacturing in that space, convert it to storage, lease it out, or sell it within 10 years, you could be required to pay back some or all of the tax savings. This isn’t a quick-flip benefit — it’s meant for long-term operators with real production activity.

Watch the Anti-Abuse Period

You also can’t just buy an old factory and write it off. If the building was used by anyone for manufacturing between January 1, 2021 and May 12, 2025, it doesn’t qualify. That anti-abuse lookback period trips up more deals than you’d think. You’ll need documentation showing what the space was used for — and brokers aren’t always equipped to give you the right answer.

Mixed-Use? Only Deduct the Manufacturing Footprint

If your business occupies part of a property and leases out the rest, only your manufacturing portion counts. You’ll need to carve out the costs based on actual use — square footage, building systems, etc. This isn’t a generic cost seg play. It’s a functional-use allocation tied to how much of the building supports actual manufacturing activity.

Didn’t Qualify? There May Still Be Options

If the building flunks the QPP test, you might still be able to expense certain components — like HVAC, roofs, security systems, or tenant improvements — under Section 179. It’s not a full write-off of the building, but it might still give you meaningful deductions in the first year. That’s especially important if you’re investing in a facility that’s used for warehousing, offices, or other non-manufacturing functions.

The §168(n) window only runs from 2025 to 2028. Miss the timing, and you miss the deduction.

Thinking about buying or building a facility for your business? Let’s make sure your structure doesn’t blow up your deduction.

I work with operators, owners, and investors who want to take full advantage of the new §168(n) manufacturing deduction. If you’ve got a project on deck and want to make sure it’s eligible before it’s too late to fix the setup — let’s talk.

This is not tax advice. But if you’re looking for real-world answers and practical modeling, I can help.

You can reach me directly at info@neil.tax or (541) 240-2933.

Depreciation vs. Cash Flow: The Hidden Tradeoff That Can Kill Your Loan Application

Neil Langlois Business Taxes, Real Estate , , , 0 Comment
Depreciation vs. Cash Flow: The Hidden Tradeoff That Can Kill Your Loan Application

If you’re a small business owner, real estate investor, or recently self-employed, this is an issue that catches people off guard—often at the worst possible time.

It tends to affect:

  • New or growing businesses
  • Contractors and asset-heavy operators
  • Real estate investors doing renovations or buying equipment
  • Anyone aggressively minimizing taxes within a few years of buying, refinancing, or expanding with debt

The problem isn’t depreciation itself.
It’s understanding how tax rules and lending rules look at the same activity very differently.

A real example from 2023

In 2023, I worked with a real estate investor who owned roughly 20–30 rental units. He focused on buying older properties and doing heavy turn work—flooring, cabinetry, countertops, and similar improvements.

From a tax standpoint, most of that spending was booked as repairs. That wasn’t sloppy bookkeeping—it was intentional.

Here’s why.

Tax law draws a distinction between:

  • Repairs, which are immediately deductible, and
  • Capital improvements, which are added to the property and deducted over time through depreciation

By 2023, bonus depreciation had already begun phasing out. Only 80% of qualifying property was eligible for bonus depreciation, and that percentage dropped again in 2024. In that environment, expensing repairs often created a larger upfront tax deduction than capitalizing improvements subject to partial bonus depreciation.

At the time, the decision made sense. Repairs reduced taxable income faster.

The problem showed up later.

In 2024, when the client tried to refinance a property, the lender could not add those repair costs back to income. From the bank’s perspective, those weren’t non-cash accounting deductions tied to assets—they were operating expenses. Qualifying income was lower, and the refinance stalled.

Same properties.
Same cash flow.
Different accounting treatment.
Very different outcome.

An infographic comparing depreciation versus cash flow in relation to loan applications, highlighting affected groups like new businesses and real estate investors, and explaining lenders' perspectives on repairs versus depreciation.

Why lenders care about depreciation

Most residential lenders underwriting one-to-four-unit properties follow agency-based underwriting guidelines, even if borrowers never hear those names mentioned.

Those guidelines are built around a simple question:
Is this income likely to continue?

Depreciation matters because:

  • It is a non-cash expense
  • It represents the accounting write-off of an asset already paid for
  • It does not affect current cash flow

Because of that, lenders are generally allowed to add depreciation back when calculating qualifying income.

Repairs and supplies are treated differently.

Even if they happened last year, lenders usually view them as recurring business costs—money that will likely need to be spent again. As a result, they are far less likely to be added back when underwriting a loan.

From a lender’s point of view:

  • Depreciation looks like an accounting adjustment
  • Repairs look like ongoing expenses

The de minimis trap in ordinary businesses

This issue isn’t limited to real estate.

The IRS allows businesses to adopt a de minimis accounting policy, which lets you expense purchases under a certain dollar amount instead of capitalizing them. The maximum threshold is $2,500 per item, but businesses are not required to use that limit. You can choose a lower threshold.

For example, if a business buys five $1,000 computers:

  • Using de minimis, that’s a $5,000 supply expense
  • Alternatively, those same computers could be capitalized and depreciated

Both approaches are allowed. The difference is a choice, not a requirement.

From a tax perspective, the result may be similar—especially now that bonus depreciation is back at 100%. But from a lender’s perspective, depreciation tied to identifiable assets is far more likely to be added back to income than a supply deduction.

Same purchase.
Same cash outlay.
Very different impact on qualifying income.

What would have changed the outcome

Looking back at the 2023 investor:

  • Flooring, cabinetry, and similar work could have been carved out as five-year property
  • Partial bonus depreciation would have applied
  • Assets would have remained on the books
  • Qualifying income would likely have been higher

The same principle applies to equipment-heavy businesses:

  • Group purchases as depreciable personal property
  • Depreciate instead of expensing everything as supplies
  • Preserve income on paper when financing is foreseeable

This isn’t about being aggressive or conservative.
It’s about being intentional.

The mistake isn’t recklessness—it’s reactive planning

Most business owners aren’t trying to sabotage financing. They’re responding to the tax incentives in front of them.

The problem arises when tax planning happens without a timeline.

Then the banker looks at the tax return and says:
“You don’t make enough money.”

From the owner’s perspective, that feels disconnected from reality. The cash flow exists. The business is running fine. But the tax return tells a different story.

The takeaway

If financing is even a possibility in the next few years, tax planning needs to align with where you’re headed, not just what you owe this year.

Sometimes that means:

  • Paying some tax
  • Delaying purchases
  • Capitalizing instead of expensing
  • Showing assets instead of repairs

And sometimes the answer is straightforward:
If the business truly isn’t profitable, depreciation won’t change that.

But when the difference is how deductions are categorized—not whether money was made—those decisions can quietly determine whether a loan gets approved.

Want help applying this to your situation?

If you’re self-employed, investing in real estate, or running a growing business, the right tax strategy depends on where you’re going—not just what shows up on this year’s return.

If you’re planning to buy, refinance, or expand, or you’re unsure how today’s deductions could affect tomorrow’s financing, we can walk through it together. That usually means reviewing your tax return, looking at how a lender will view your income, and aligning your tax decisions with your longer-term goals.

If that sounds useful, email info@neil.tax and let me know what you’re working toward.

“How to Leverage 1031 Exchanges to Elevate Your Real Estate Portfolio”

Neil Langlois Business Taxes, Real Estate , , , , , 0 Comment
1031 Exchange

Introduction:
In the dynamic world of real estate investing, savvy investors are constantly seeking strategies to maximize returns while minimizing taxes. One such powerful tool at their disposal is the 1031 exchange. This article delves deep into the intricacies of 1031 exchanges, providing you with actionable insights to not just defer taxes but to significantly enhance the efficiency and growth of your investment portfolio.

Understanding 1031 Exchanges:
At its core, a 1031 exchange allows real estate investors to defer capital gains taxes by reinvesting the proceeds from the sale of one property into another. However, the true artistry of leveraging this strategy lies beyond mere tax deferral. Strategic reallocation of your property’s basis and a deep understanding of depreciation opportunities can unlock levels of investment efficiency that many, including seasoned CPAs, often overlook.

Navigating Common Pitfalls:
Despite its potential, the path to mastering 1031 exchanges is fraught with complexity. From accurately tracking old assets to navigating the nuanced requirements of the IRS code, the process can be intimidating. Moreover, a common stumbling block for many investors and tax professionals alike is the execution phase, where the intricacies of reallocating basis and optimizing depreciation schedules are critical.

Strategies for Maximizing Benefits:

  • Continued Depreciation: Learn how to continue depreciating the basis of your old property over its remaining life, rather than starting anew. This can significantly accelerate your tax benefits and enhance cash flow in the near term.
  • Rebalancing Basis: Discover the advantages of rebalancing your old property’s basis over the new property’s asset classes. This often overlooked step can shift non-depreciable land basis to depreciable assets such as buildings and land improvements, yielding substantial depreciation deductions.

Detailed Example Case Study:

Imagine you own a commercial property with an adjusted basis of $1.3 million, where $1 million is allocated to the land (non-depreciable) and $300,000 to the building (depreciable over its remaining 9 years, instead of the full 39 years). This scenario is quite common, but the strategic response to it is what sets apart savvy investors.

Initial Scenario:

  • Old Property Adjusted Basis: $1.3 million ($1 million land, $300,000 building)
  • Remaining Depreciation Life of Building: 9 years

You decide to engage in a 1031 exchange and acquire a new property. The new property is valued at $4 million, with an asset class ratio of 75% building and 25% land. Most investors and their CPAs might simply add the old basis to the new property’s total and depreciate over a new 39-year cycle. However, a more nuanced approach can yield significant benefits.

Strategic Approach:

  • Continue Depreciating Old Building Basis: Instead of restarting the depreciation schedule for the $300,000 building basis over 39 years, you choose to continue the depreciation over the remaining 9 years. This approach provides an annual depreciation deduction of approximately $33,333 ($300,000 / 9 years) instead of $7,692 ($300,000 / 39 years), significantly enhancing your near-term cash flow.
  • Rebalance Basis Over New Asset Classes: You then assess the new property’s ratio of building to land value (75% building, 25% land). By rebalancing your old property’s $1.3 million adjusted basis according to this ratio, you allocate 75% ($975,000) to the building and 25% ($325,000) to the land of the new property.

This rebalancing allows you to depreciate $975,000 over the remaining 9 years of the old property’s depreciation schedule, translating to an annual depreciation deduction of approximately $108,333. This is a significant increase compared to not rebalancing and merely continuing with the old $300,000 building basis or starting anew with a full 39-year depreciation schedule.

Impact Analysis:

  • Without Strategic Rebalancing: Annual depreciation = $7,692 (over 39 years)
  • With Strategic Rebalancing: Annual depreciation = $108,333 (over 9 years)

Conclusion:
This strategic approach to a 1031 exchange not only defers taxes but recharacterizes old, unused basis into a powerful tool for current income tax deductions in the form of accelerated depreciation. It’s a nuanced strategy that requires careful planning and execution but can significantly impact your investment’s financial performance.

Final Thoughts:
Leveraging 1031 exchanges to your advantage requires a deep understanding of tax laws and strategic financial planning. By meticulously analyzing your investment’s basis and potential for depreciation, you can uncover opportunities that enhance your portfolio’s value and growth potential.

For those looking to navigate these waters, consulting with a tax professional who specializes in real estate investments and understands the intricacies of 1031 exchanges is crucial. Their expertise can guide you through the process, ensuring compliance while maximizing financial benefits.

Remember, in the realm of real estate investing, knowledge is not just power—it’s profit.