QPP and Bonus Depreciation: How They Work Together

Bonus depreciation is a tax incentive that allows businesses to immediately deduct a percentage of the cost of eligible property in the year it is placed in service. QPP and bonus depreciation work together to create substantial first-year deductions for manufacturing buildings, combining the statutory 20-year recovery period with bonus percentage write-offs.

The Tax Cuts and Jobs Act expanded bonus depreciation to 100% for property placed in service between September 27, 2017, and December 31, 2022, with phasedown beginning in 2023. Qualified Production Property bonus depreciation allowed manufacturers to deduct the entire cost of qualifying buildings in year one during the 100% period, creating unprecedented tax benefits for domestic manufacturing investment.

For context on broader depreciation acceleration strategies, refer to the cost segregation overview. This article focuses on how QPP accelerated depreciation interacts with bonus provisions.

QPP-eligible buildings qualify for bonus depreciation if they meet the requirements of Section 168(k). The property must be new to the taxpayer (meeting the original use or used property acquisition rules), placed in service during a year when bonus depreciation is available, and have a recovery period of 20 years or less. QPP's 20-year classification satisfies the recovery period test.

The placed in service date determines the applicable bonus percentage. Properties placed in service when 100% bonus was available could deduct the entire building cost in year one. As bonus phases down, the first-year deduction decreases, but the combination of partial bonus plus accelerated 20-year depreciation still provides significant timing benefits.

Bonus Eligibility Requirements for QPP

• Property Type: QPP-qualifying manufacturing or production building.
• Recovery Period: 20 years (meets the Section 168(k) recovery period test).
• Acquisition/Original Use: Meets new property or qualified used property rules.
• Placed in Service: During a year when bonus depreciation is available.

QPP Section 168(k) interaction is governed by the statutory language defining bonus depreciation eligibility. Section 168(k) allows additional first-year depreciation for qualified property, defined as property with a recovery period of 20 years or less. QPP buildings meet this definition because their 20-year classification falls within the recovery period threshold.

The interaction creates a layered benefit. First, QPP classification shortens the recovery period from 39 to 20 years. Second, the 20-year classification makes the property eligible for bonus depreciation. Third, bonus depreciation allows immediate deduction of a percentage of the basis. The combination delivers acceleration that neither provision alone would provide.

Bonus depreciation phases down according to the statutory schedule established by the Tax Cuts and Jobs Act. The phasedown reduces the bonus percentage by 20 percentage points per year until reaching zero. Understanding the phasedown schedule is critical for manufacturing building bonus write-off planning and timing decisions.

For property placed in service in 2023, bonus was 80%. For 2024, it decreased to 60%. The phasedown continues in subsequent years. Property placed in service after the phasedown completes receives no bonus but still benefits from the QPP 20-year recovery period if it qualifies.

The phasedown affects timing decisions for manufacturers planning new construction or acquisitions. Placing property in service earlier in the phasedown schedule captures higher bonus percentages, but operational and construction realities may not align with optimal tax timing. Work with your CPA to model the trade-offs between timing acceleration and bonus percentage.

Calculating first-year deductions for 100% bonus depreciation QPP is straightforward when bonus is 100%: the entire depreciable basis is deducted in year one. For partial bonus percentages, the calculation involves applying the bonus percentage to the basis, then depreciating the remaining basis over 20 years using the applicable convention and method.

Example: A $5 million QPP building placed in service in 2024 (60% bonus) would generate $3 million bonus depreciation in year one. The remaining $2 million basis is depreciated over 20 years. Assuming half-year convention, year one regular depreciation would be approximately $50,000 (half-year of 5% rate). Total first-year deduction would be approximately $3,050,000, or 61% of basis.

First-Year Deduction Components

• Bonus Depreciation: Depreciable basis multiplied by applicable bonus percentage.
• Regular Depreciation: Remaining basis (after bonus) depreciated over 20 years using MACRS with applicable convention.
• Total First-Year: Sum of bonus and regular depreciation for year one.

Tax planning for QPP accelerated depreciation with bonus depreciation should consider the taxpayer's ability to use first-year deductions, the impact of bonus phasedown on timing decisions, and the interaction with other tax provisions such as passive activity rules and alternative minimum tax.

Manufacturers with sufficient taxable income can maximize benefit by placing property in service when higher bonus percentages are available. Taxpayers limited by passive loss rules or other restrictions should model whether large first-year deductions create suspended losses, and whether deferring placement or electing out of bonus creates better long-term value.

For guidance on specific manufacturing property types that qualify for QPP, see Manufacturing Buildings That Qualify for QPP. For broader context on depreciation timing, refer to the QPP overview.

Comparing QPP with and without bonus depreciation illustrates the magnitude of the bonus benefit. Without bonus, a QPP building generates approximately 5% annual depreciation (20-year straight line). With 100% bonus, the entire building is deducted in year one. Even with partial bonus, the first-year deduction significantly exceeds regular QPP depreciation.

The long-term total depreciation is the same with or without bonus (both eventually deduct the full basis). The difference is timing. Bonus front-loads deductions into year one, creating immediate tax savings and cash flow benefits. The time value of money makes earlier deductions more valuable, even though total deductions over the asset life are identical.