The Big Beautiful Bill Act brings a new tax incentive for manufacturing industry: the special depreciation allowance for qualified production property.
Extra Depreciation
This incentive lets you deduct the entire cost of building a manufacturing facility in the year you put the facility into use, instead of spreading the deduction over the usual 39 years for buildings. This is a special type of bonus depreciation called the “qualified production property” deduction.
Who Can Use This
This applies to domestic (US) nonresidential real property (like factories or warehouses) used for:
- manufacturing, or
- refining tangible goods or
- agricultural production or
- chemical production
Requirements
There is an important requirement: the property must undergo a “substantial transformation.” This means the process changes raw materials into a finished product, like turning steel into car parts. The Act specifies that the Secretary must issue regulations and guidance to what constitutes substantial transformation, so we are not clear on that yet.
Any portion of the property you use for activities not related to the manufacturing activity like: parking, storage, office space, admin work, sales activities, research etc. you have to depreciate over 39 years, because it does not qualify for this incentive.
Construction must start between January 19, 2025, and January 1, 2029 and you must place the property in service (ready for use) before January 1, 2031.
Depreciation Recapture
And you must use the “qualified property” for at least 10 years in the manufacturing, production or refining activity, otherwise, you have to “give back” the tax benefit. When you stop using the property in a qualified production activity you will have a “depreciation recapture”. It will be considered like you sold the property at fair market value.
These are the general provisions, but we expect regulations and guidance from the IRS in the coming months.
If you need a good CPA firm for your business that works with you throughout the year, not only at tax time, contact us.
Please note that this blog post is for informational purposes only and does not constitute tax, legal or accounting advice and that new changes in rules and regulations may render this content out of date.