Qualified Production Property (QPP)?

Qualified production property represents a specific category of real property that receives favorable depreciation treatment under federal tax law. The classification applies primarily to manufacturing buildings and related structures that meet technical requirements set by the IRS.

Unlike general commercial real estate that depreciates over 39 years, qualified production property can qualify for accelerated depreciation schedules. This timing benefit can significantly improve cash flow for manufacturing businesses, particularly when combined with bonus depreciation rules.

The cost segregation strategy focuses on component level reclassification, while QPP applies to entire building structures. Understanding this distinction helps property owners identify which tax strategy or combination of strategies fits their situation.

IRS Notice 2016-16 provides the authoritative guidance for qualifying production property classification. Released in 2016, this notice clarified longstanding uncertainty about which manufacturing buildings qualify for accelerated depreciation and how the rules apply.

The notice defines qualifying property, outlines use tests, and provides examples of structures that do and do not qualify. It addresses both structural requirements and functional use criteria that must be satisfied for QPP treatment.

For property owners considering QPP classification, IRS Notice 2016-16 serves as the primary reference document. Your tax advisor should review your specific facts against the notice requirements to determine eligibility and document the position.

Qualified production property eligibility depends on satisfying both a structural test and a use test. The building must be real property that is integral to manufacturing activity, not merely incidental or supportive.

The use test requires that the building be used in manufacturing, production, extraction, or furnishing of utilities. Administrative offices, warehouses, and distribution centers generally do not qualify even if located on the same site as manufacturing operations.

Documentation requirements for QPP include evidence of manufacturing use, architectural plans showing building function, and records demonstrating that the structure is integral to production. Proper documentation at the time property is placed in service helps support the position if questioned.

Manufacturing buildings that qualify for QPP treatment include production facilities where tangible personal property is manufactured, assembled, processed, or refined. The building must house machinery and equipment directly used in the production process.

Assembly plants, food processing facilities, pharmaceutical manufacturing, electronics production, and similar operations typically qualify when structural and use tests are met. Extraction facilities and certain utility furnishing structures may also qualify under specific circumstances.

Buildings used primarily for administrative functions, storage, or distribution do not qualify even if connected to manufacturing operations. The functional use of the specific structure determines eligibility, not the overall business activity on the property.

When qualified production property meets bonus depreciation requirements, the tax benefits can be substantial. Bonus depreciation allows immediate expensing of a percentage of the building cost, subject to applicable phase out schedules and rules in effect for the placed in service year.

The interaction between QPP classification and bonus depreciation creates planning opportunities for manufacturing property owners. New construction or substantial improvements placed in service during years with bonus depreciation availability can generate significant first year deductions.

Your CPA should model the expected tax impact of combining QPP with available bonus depreciation based on your marginal rate, alternative minimum tax position, and other tax attributes. The timing of placed in service dates can materially affect the benefit.

QPP and cost segregation serve different functions in tax planning. QPP is a building level classification that can apply to the entire structure, while cost segregation identifies specific components within any building for reclassification to shorter lives.

A manufacturing building qualifying as QPP might also benefit from a cost segregation study to identify personal property and land improvements within the structure. The strategies are complementary rather than mutually exclusive in many cases.

For detailed comparison of approaches and when each makes sense, see QPP vs Cost Segregation: Key Differences. Understanding both strategies helps determine the optimal depreciation approach for your manufacturing property.

QPP rules generally favor new construction over acquisition of existing buildings. The original use requirement means that purchased existing buildings typically do not qualify unless substantial improvements are made that rise to the level of new property.

Substantial improvement analysis requires comparing the cost of improvements to the adjusted basis of the building. The threshold and calculation can be complex, and not all renovation work qualifies as substantial improvement for QPP purposes.

If you are acquiring an existing manufacturing building, consult your tax advisor before closing to understand whether retrofit or improvement strategies could create QPP eligibility. The timing and structuring of improvements can affect whether the requirements are met.

Claiming QPP status requires proper classification on your tax return and supporting documentation. For property not previously claimed as QPP, an accounting method change using Form 3115 may be required to reclassify the depreciation treatment.

Your tax preparer should ensure that depreciation schedules reflect the correct recovery period, bonus depreciation is applied if applicable, and required disclosures are made on the return. Inadequate documentation or improper filing can result in benefits being disallowed on audit.

For step by step filing guidance, refer to How QPP Is Claimed (Form 3115 and Tax Filing). This resource covers the specific forms, deadlines, and procedural requirements for claiming QPP benefits.

Common QPP pitfalls include claiming buildings that fail the use test, inadequate documentation of manufacturing activity, misunderstanding the original use requirement, and failing to coordinate QPP with other depreciation elections.

Another frequent error is assuming all buildings on a manufacturing campus qualify. Warehouses, administrative buildings, and distribution centers on the same property as production facilities generally do not meet the QPP criteria even if owned by the same entity.

Avoiding these mistakes requires careful analysis at the time property is acquired or placed in service. Retroactive fixes can be more complicated and may require amended returns or accounting method changes, so getting it right initially saves time and cost.