QPP Depreciation Treatment and Recovery Periods

QPP depreciation treatment provides a 20-year MACRS recovery period for qualifying manufacturing and production buildings. This statutory classification reduces the depreciation period from the standard 39-year life for nonresidential real property, effectively doubling the annual depreciation deduction and accelerating tax benefits into earlier years of ownership.

The QPP recovery period of 20 years applies to the entire building structure that qualifies under the production use and structural integration tests. Land improvements and personal property within the building are depreciated separately under their own classification rules, which may provide even shorter lives through cost segregation analysis.

For background on QPP qualification and eligibility, refer to the Qualified Production Property overview. This article focuses on the mechanics of Qualified Production Property MACRS life and depreciation calculations.

QPP is depreciated using the straight-line method under the Modified Accelerated Cost Recovery System (MACRS). While the term "accelerated" in MACRS often refers to declining balance methods, QPP uses straight-line depreciation with acceleration coming from the shorter 20-year life rather than from accelerated depreciation methods.

Straight-line depreciation means the annual deduction is the same each full year (subject to convention adjustments in the first and last years). For a building with $5 million depreciable basis depreciated over 20 years, the annual straight-line depreciation is $250,000, compared to approximately $128,000 over 39 years for standard treatment.

MACRS Straight-Line Characteristics

• Method: Straight-line depreciation, equal amounts each year.
• Recovery Period: 20 years for QPP-qualifying buildings.
• Convention: Half-year or mid-quarter, depending on when property is placed in service.
• Basis: Depreciable basis after land allocation and any bonus depreciation.

QPP depreciation schedule is affected by the applicable depreciation convention. The half-year convention applies if QPP property is not subject to mid-quarter convention rules. Under half-year convention, property placed in service at any point during the year receives a half-year of depreciation in the first year, regardless of the actual placed in service date.

Mid-quarter convention applies if more than 40% of the total depreciable basis of all property placed in service during the year (excluding residential rental property and nonresidential real property) is placed in service in the last quarter. If mid-quarter applies, first-year depreciation is based on the quarter the property was placed in service, with Q1 receiving 87.5% of a full year, Q2 receiving 62.5%, Q3 receiving 37.5%, and Q4 receiving 12.5%.

Annual depreciation for QPP is calculated by dividing the depreciable basis by the 20-year recovery period, with adjustments for the applicable convention in the first and last years. For property under half-year convention, year one receives half the annual amount, years two through twenty receive the full annual amount, and year twenty-one receives the remaining half.

Example calculation for a $10 million QPP building (excluding land and bonus depreciation): Annual depreciation is $10,000,000 / 20 = $500,000. Under half-year convention, year one deduction is $250,000, years 2-20 are $500,000 each, and year 21 is $250,000. Total depreciation over the life equals the full $10 million basis.

Comparing manufacturing property accelerated depreciation under QPP to standard 39-year treatment illustrates the magnitude of the benefit. The 20-year recovery period generates approximately 5% annual depreciation (full years) compared to approximately 2.5% for 39-year property, doubling the annual deduction amount.

Over the first 20 years, QPP results in 100% of the basis being depreciated, while standard 39-year treatment would only depreciate approximately 51% of the basis over the same period. This timing difference creates substantial present value benefits through earlier deductions, even though total lifetime depreciation is the same.

The QPP tax write-off timeline extends over 20 full years plus partial years at the beginning and end based on the applicable convention. For manufacturers planning long-term ownership, this timeline provides consistent annual deductions that reduce taxable income throughout the holding period.

When combined with bonus depreciation, the write-off timeline can be dramatically compressed. During years when 100% bonus depreciation was available, the entire QPP building basis could be deducted in year one, eliminating the extended timeline entirely. Even with partial bonus, a significant portion of the basis is front-loaded into year one, with the remainder depreciated over 20 years.

QPP depreciation is subject to depreciation recapture under Section 1250 upon disposition of the property. Depreciation claimed under the 20-year recovery period is recaptured as ordinary income to the extent of gain, up to the total depreciation taken. This recapture treatment is identical to other nonresidential real property.

The recapture impact is greater for QPP than for 39-year property because more depreciation has been claimed over the same holding period. Manufacturers should model the recapture impact when evaluating disposition strategies, though the present value benefit of earlier deductions typically exceeds the recapture cost for properties held more than a few years.

For guidance on claiming QPP and filing requirements, see How QPP Is Claimed (Form 3115 and Tax Filing). For broader depreciation planning context, refer to the cost segregation overview.