Common QPP Mistakes and Misconceptions

Common QPP mistakes often stem from misunderstanding the eligibility requirements or applying QPP treatment to property that does not qualify. The most frequent error is claiming 20-year depreciation for buildings that do not meet the production use percentage threshold or lack the structural integration with manufacturing operations required by IRS guidance.

Property owners sometimes assume that any building on a manufacturing campus qualifies for QPP, leading to incorrect treatment of warehouses, distribution centers, and administrative offices. Another common mistake is applying QPP to land, personal property, or building components that should be separately classified under cost segregation rather than treated as part of the QPP building structure.

For background on what qualifies as QPP, refer to the Qualified Production Property overview. For related depreciation strategies, see the cost segregation hub. This article focuses on specific errors and misconceptions that lead to QPP compliance issues and potential IRS challenges.

QPP eligibility errors frequently involve misunderstanding what constitutes a qualifying activity or qualifying property. A common misconception is that any building used by a manufacturing company qualifies for QPP. In reality, the building must be used directly in the manufacturing process, not merely owned by a manufacturer or located on manufacturing property.

Warehouses and distribution centers are commonly misclassified as QPP when they function as storage or logistics facilities rather than production spaces. Similarly, administrative offices, sales facilities, and general support buildings do not qualify even if they are essential to the manufacturing operation. The building must be structurally integrated with production activities, not simply associated with a manufacturing business.

Common Eligibility Misconceptions

• All Manufacturing Property Qualifies: Incorrect assumption that any building on a manufacturing campus receives QPP treatment.
• Warehouses Qualify: Believing that warehouses qualify because they store manufactured goods or raw materials.
• Administrative Buildings Qualify: Assuming offices qualify because they support manufacturing operations.
• Personal Property Included: Incorrectly including machinery, equipment, or furniture in QPP building basis.
• Land Included: Applying QPP depreciation to land value rather than only building improvements.

QPP documentation mistakes represent a critical failure mode that becomes apparent during IRS examination. Many taxpayers claim QPP treatment without obtaining engineering analysis, calculating production use percentages, or documenting the building's structural integration with manufacturing operations. When the IRS requests support for the QPP position, the lack of documentation can result in disallowance of the treatment and recalculation of depreciation over 39 years.

Adequate documentation includes engineering or architectural analysis demonstrating structural integration, calculations showing production use percentage, building plans, operational records evidencing manufacturing activities, and contemporaneous support for the QPP election. Documentation created after an audit begins is less persuasive than contemporaneous records prepared when the property was placed in service or when the accounting method change was filed.

Incorrect QPP depreciation often results from mechanical errors in applying MACRS conventions, recovery periods, or bonus depreciation rules. Common calculation mistakes include using the wrong convention (half-year vs mid-quarter), applying an incorrect recovery period, miscalculating bonus depreciation, and failing to adjust basis properly when Form 3115 creates a Section 481(a) adjustment.

Another frequent error involves depreciating the entire property value including land, or including personal property (equipment, machinery, furniture) in the QPP building basis. QPP applies only to real property improvements, not land or personal property. Cost segregation can be layered with QPP to accelerate personal property components, but the personal property must be separately identified and depreciated under its own recovery period.

Common Depreciation Calculation Errors

• Wrong MACRS Convention: Using half-year when mid-quarter applies, or vice versa.
• Incorrect Recovery Period: Using 15-year or 39-year life instead of 20-year QPP life.
• Bonus Depreciation Errors: Applying incorrect bonus percentage or applying bonus when not available.
• Basis Errors: Including land, personal property, or failing to adjust for Section 481(a).
• Mixed-Use Allocation: Failing to separately allocate qualifying and non-qualifying portions.

The production use percentage test is a critical QPP requirement that is frequently misunderstood or miscalculated. Some taxpayers assume that any building on a manufacturing site meets the threshold, while others fail to perform the calculation at all. The production use percentage measures the portion of the building used directly in manufacturing versus administrative, warehousing, or other non-production functions.

Mistakes include counting administrative areas as production space, including warehouse square footage in the production calculation, using gross building area instead of allocating by actual use, and failing to exclude support functions that do not qualify as production activities. The calculation must be performed accurately and documented with building plans showing the allocation of space to different functions.

Form filing errors related to QPP include incomplete or incorrect Form 3115 when changing accounting methods, missing attachments or schedules, incorrect Section 481(a) adjustment calculations, and filing under the wrong procedure (automatic vs non-automatic). These errors can result in the IRS rejecting the accounting method change or challenging the QPP treatment during examination.

On Form 4562, common errors include reporting QPP property with the wrong recovery period, failing to properly designate the property as 20-year MACRS, incorrect bonus depreciation calculations, and inadequate property descriptions. The form should clearly identify the property as QPP with supporting schedules showing the depreciation computation.

QPP audit triggers include claiming 20-year treatment for property types that rarely qualify, such as warehouses, distribution centers, or office buildings. Large Section 481(a) adjustments from Form 3115 method changes attract IRS attention, particularly when not supported by adequate documentation or engineering analysis.

Significant increases in depreciation deductions coinciding with QPP elections may trigger examination, especially if the taxpayer cannot produce contemporaneous documentation supporting eligibility. Inconsistent treatment of similar properties—claiming QPP for some buildings but not others—can raise questions about the legitimacy of the QPP positions. To minimize audit risk, maintain comprehensive documentation and ensure QPP treatment is applied only to clearly qualifying property.

For guidance on managing IRS scrutiny and audit risk, see the article on QPP Audit Risk and IRS Scrutiny. That article addresses documentation strategies and audit defense for Qualified Production Property positions.