QPP Eligibility Requirements Explained

QPP eligibility requirements establish the framework for determining whether property qualifies for the accelerated 20-year MACRS recovery period. These requirements are technical and must be evaluated based on the specific facts of the property, including building design, operational use, and documentation. Meeting the requirements unlocks significant depreciation benefits, while failing any test results in standard 39-year treatment.

The Qualified Production Property criteria are outlined in Section 168(e)(3)(E) of the Internal Revenue Code and clarified through IRS Notice 2016-16. The tests are objective and require factual support through engineering analysis, architectural plans, and operational records. Property owners should work with tax advisors and potentially engineering consultants to document compliance with each requirement.

For context on how QPP fits into broader depreciation planning, refer to the Qualified Production Property hub. This article focuses on the specific eligibility tests that determine who qualifies for QPP treatment.

The first requirement is that the property must be nonresidential real property as defined under Section 168(e)(2)(B). This includes the building structure, structural components, and certain permanently affixed improvements. The property type test excludes land, personal property, and certain specialized property categories that have their own depreciation classifications.

Real property for QPP purposes includes the building shell, structural systems, HVAC integrated into the structure, and improvements that are permanently attached and considered part of the real estate. Machinery, equipment, and removable fixtures are not real property and are depreciated separately, often through cost segregation or equipment-specific depreciation schedules.

The distinction between real property and personal property is important because QPP applies only to the real property portion. Manufacturers can layer QPP treatment for the building with cost segregation for personal property components to maximize total accelerated depreciation across all asset categories.

The qualifying activity test requires that the property be used in manufacturing, production, extraction, or furnishing of certain utilities. Manufacturing property tax eligibility depends on the nature of the activity conducted in the building, not just the industry classification of the owner. The building must be used for the actual production process, not administrative or support functions.

Qualifying activities include fabrication of tangible goods, assembly operations, processing raw materials, extraction of natural resources, and production of electricity or natural gas. Activities that do not qualify include warehousing, distribution, retail sales, and general office administration. Even within a manufacturing company, only buildings used directly in production qualify for QPP.

Qualifying vs Non-Qualifying Activities

• Qualifying: Production lines, assembly bays, processing areas, fabrication zones, extraction operations, power generation facilities.
• Not Qualifying: Finished goods warehouses, administrative offices, sales showrooms, distribution centers, general storage.
• Potentially Qualifying: Work-in-process storage integral to production flow, quality control labs directly supporting production, production support utilities.

The production use percentage test requires that a specified portion of the building be used for qualifying production activities. IRS Notice 2016-16 provides guidance on calculating this percentage and establishing the minimum threshold for QPP qualification. Buildings with mixed use (production and non-production) must allocate square footage and demonstrate that the production portion meets the required threshold.

The calculation typically involves measuring the floor area used for qualifying activities relative to total building square footage. Certain ancillary spaces directly supporting production may be included in the production percentage, while administrative, sales, and general storage areas are excluded. Documentation should include floor plans with use allocations clearly marked.

The QPP structural requirements mandate that the building be integral to the production process. This means the structure is designed, constructed, or substantially modified to accommodate production activities. Generic commercial buildings that could be repurposed for other uses without significant modification typically do not meet this requirement.

Evidence of structural integration includes specialized building systems (heavy-duty electrical, industrial HVAC, reinforced floors), production-specific layouts, equipment integration features, and design elements tailored to the manufacturing process. Buildings with high bay ceilings, crane systems, specialized ventilation, and production-specific structural modifications demonstrate the required integration.

The structural test is distinct from the use test. A building could be used for production but still fail QPP if it is a generic structure without production-specific design elements. Conversely, a purpose-built manufacturing facility that meets the structural test still requires the qualifying use and percentage tests to achieve QPP classification.

QPP treatment applies to property placed in service after December 31, 2017. The placed in service date is when the property is ready and available for its specifically assigned function. For new construction, this is typically when construction is substantially complete and the building can be used for production. For acquired property, it is when the property is ready for use under the new owner.

The placed in service date affects bonus depreciation eligibility and the applicable depreciation conventions. Properties placed in service in different years may have different bonus percentages and different first-year depreciation amounts under mid-quarter or half-year conventions. Coordinate with your CPA to determine the correct placed in service date for your facts.

Supporting a QPP position requires thorough documentation. The IRS expects property owners to demonstrate compliance with each eligibility test through objective evidence. Documentation should include architectural or engineering plans, operational use descriptions, production use percentage calculations, and evidence of the placed in service date.

Many property owners engage engineering firms to prepare a QPP qualification study. This study documents the building design, analyzes compliance with each requirement, calculates the production use percentage, and provides technical support for the QPP election. The study serves as contemporaneous documentation if the position is examined during an IRS audit.

Recommended Documentation Elements

• Building Plans: Architectural and engineering drawings showing production areas and structural features.
• Operational Description: Narrative explaining the production process and how the building supports it.
• Use Allocation: Floor plan with square footage allocations between production and non-production uses.
• Structural Analysis: Engineering evaluation of production-specific structural elements.
• Placed in Service Evidence: Permits, certificates of occupancy, acquisition documents establishing the relevant date.

Understanding QPP qualified property tests in context helps clarify application to real-world situations. A food processing plant with dedicated production floors, specialized refrigeration, and food-grade structural systems typically qualifies for QPP on the production portion of the building. Administrative offices and finished goods warehouses in the same structure would be separately depreciated over 39 years.

An automotive assembly plant with production lines, robotic equipment integration, and specialized building systems designed for assembly operations generally qualifies. However, the separate sales showroom and administrative headquarters building on the same campus would not qualify, even though they are owned by the same manufacturing company.

For additional detail on determining eligibility for specific property types, see IRS Notice 2026-16: Qualified Production Property Guidance Explained. For broader depreciation planning strategies, refer to the cost segregation overview.