QPP vs Cost Segregation: Key Differences
Published: February 27, 2026
QPP and cost segregation are distinct depreciation strategies that can be used independently or in combination. QPP reclassifies the entire building structure to a 20-year recovery period based on qualifying use, while cost segregation identifies specific components for 5, 7, or 15-year lives based on engineering analysis and component function.
Manufacturers often evaluate both strategies to determine which approach maximizes tax benefits for their specific property. This article compares QPP vs cost segregation, explains the key differences, and discusses how these strategies can be layered for optimal depreciation treatment.
TL;DR - Key Takeaway
Fundamental Differences
The fundamental difference between QPP vs cost segregation lies in their approach to accelerating depreciation. QPP is a statutory classification that reclassifies the entire building structure to a 20-year recovery period based on qualifying production use. Cost segregation is an engineering-based analysis that identifies specific components for 5, 7, or 15-year lives based on function and regulatory precedent.
Qualified Production Property vs cost segregation study comparison reveals that QPP operates at the building level, while cost segregation operates at the component level. QPP requires meeting statutory use and structural tests. Cost segregation requires detailed engineering analysis and component classification. Both accelerate depreciation but through different legal and technical mechanisms.
For comprehensive background on depreciation acceleration strategies, refer to the cost segregation overview. For details on QPP qualification requirements, see the Qualified Production Property hub. This article focuses on the specific differences and strategic considerations when evaluating QPP compared to cost segregation.
Methodology Comparison
QPP methodology involves determining whether the building meets the qualifying activity test, production use percentage threshold, and structural integration requirement. The analysis focuses on building-level classification, not individual components. Once qualified, the entire structure receives 20-year treatment.
Cost segregation methodology involves detailed engineering analysis to identify building components that qualify as personal property (5 or 7 year) or land improvements (15 year) rather than real property (39 year). This requires component-by-component evaluation, engineering calculations, and creation of detailed asset listings supporting the reclassification.
Table 1: Methodology Comparison
| Aspect | QPP | Cost Segregation |
|---|---|---|
| Basis | Statutory classification based on use | Engineering analysis based on component function |
| Analysis Level | Building as a whole | Component-by-component |
| Recovery Periods | 20 years for qualifying building | 5, 7, 15 years for identified components |
| Documentation | Use analysis, structural integration proof | Engineering report, detailed component listings |
| Property Type Scope | Manufacturing/production buildings only | Any commercial property |
Eligibility Differences
QPP eligibility is limited to nonresidential real property used in manufacturing, production, extraction, or qualifying utility operations. The building must meet the production use percentage threshold and structural integration test, and must be placed in service after December 31, 2017. Non-manufacturing buildings cannot qualify for QPP regardless of other factors.
Cost segregation eligibility is much broader. Any commercial property owner can pursue cost segregation, including office buildings, retail centers, apartments, hotels, and industrial facilities. There are no industry-specific requirements or use restrictions. The only requirement is that the property contains components that qualify for reclassification based on engineering analysis.
This difference makes cost segregation available to a much wider range of property owners, while QPP is a specialized strategy for manufacturers and production companies. However, qualifying manufacturers can potentially benefit from both strategies applied to different components of their property.
Tax Benefit Comparison
Tax benefits from QPP come from shifting the entire building structure from 39-year to 20-year depreciation. For a $10 million manufacturing building, this nearly doubles annual building depreciation from approximately $256,000 to $500,000 per year. When combined with bonus depreciation, the entire building structure can potentially be deducted in year one.
Tax benefits from cost segregation come from reclassifying components to 5, 7, and 15-year lives. A typical cost segregation study might reclassify 20-40% of building cost to accelerated categories. For a $10 million property, this could shift $2-4 million to shorter lives, generating significant first-year deductions, especially when combined with bonus depreciation.
The relative benefit depends on the specific property. Manufacturing buildings with high production use percentages may see greater acceleration from QPP at the building level. Properties with significant personal property content may benefit more from granular cost segregation. Combining both strategies can deliver the greatest total benefit.
Implementation Complexity
QPP implementation is simpler than cost segregation in terms of analysis and documentation requirements. A QPP qualification study typically focuses on demonstrating compliance with the use, percentage, and structural integration tests. The deliverable is documentation supporting the building-level classification, not detailed component listings.
Cost segregation implementation is more complex and detailed. A full cost segregation study involves site visits, engineering analysis, component identification, cost allocation, and creation of detailed asset schedules. The deliverable is a comprehensive report with component-by-component classifications and supporting engineering analysis.
From a CPA implementation perspective, QPP is straightforward because it changes the depreciation life of a single asset (the building). Cost segregation requires creating multiple new asset records for each reclassified component category. However, both require proper Form 4562 reporting and, for lookback applications, Form 3115 accounting method changes.
Combining QPP and Cost Segregation
Manufacturing property tax strategies often involve combining QPP and cost segregation for maximum benefit. QPP reclassifies the building structure to 20 years, while cost segregation identifies personal property (equipment, fixtures, specialized systems) and land improvements (parking, landscaping, site utilities) for 5, 7, or 15-year lives.
This layered approach applies the most favorable treatment to each asset category. The building structure gets QPP treatment (20 years instead of 39), personal property gets 5-7 year treatment through cost segregation, and land improvements get 15-year treatment. The combined acceleration exceeds what either strategy alone could deliver.
Combined Strategy Benefits
- Building Structure: QPP 20-year recovery period instead of 39 years.
- Personal Property: Cost segregation 5-7 year recovery periods plus bonus depreciation eligibility.
- Land Improvements: Cost segregation 15-year recovery period instead of 39 years.
- Total Acceleration: Maximum depreciation acceleration across all property categories.
For guidance on how QPP and bonus depreciation work together, see QPP and Bonus Depreciation: How They Work Together.
Decision Framework
Manufacturers evaluating QPP depreciation vs accelerated depreciation through cost segregation should analyze their specific property characteristics, tax position, and planning objectives. The decision framework should consider property type eligibility, potential acceleration from each method, implementation complexity, and the feasibility of combining both strategies.
Table 2: Strategy Selection Framework
| Property Characteristic | Recommended Strategy | Rationale |
|---|---|---|
| Qualifying manufacturing building, high production use % | QPP + Cost Segregation | QPP for building, cost seg for personal property and land improvements |
| Manufacturing building, mixed use, below QPP threshold | Cost Segregation Only | Building does not qualify for QPP, use cost seg for components |
| Non-manufacturing commercial property | Cost Segregation Only | QPP not available, cost seg applies to any property type |
| Simple production building, minimal personal property | QPP Only | QPP provides building acceleration, limited cost seg benefit |
Work with your CPA and potentially an engineering consultant to model the tax benefit from each approach. The analysis should quantify first-year deductions, net present value of acceleration, and implementation costs to determine the optimal strategy for your specific situation.
Frequently Asked Questions
What is the main difference between QPP and cost segregation?
QPP reclassifies the entire building structure to a 20-year recovery period based on qualifying production use, while cost segregation identifies specific building components for 5, 7, or 15-year lives through engineering analysis. QPP is statutory, cost segregation is component-based.
Which provides better tax benefits, QPP or cost segregation?
It depends on the property. QPP may provide greater building-level acceleration for qualifying manufacturing facilities. Cost segregation can identify more components for very short lives (5-7 years) and works on any commercial property type. Many manufacturers combine both strategies for maximum benefit.
Can I use QPP and cost segregation together on the same property?
Yes, you can apply QPP treatment to the qualifying building structure and perform cost segregation to identify personal property, land improvements, and other components for accelerated lives. This layered approach maximizes total depreciation acceleration across all asset categories.
Is cost segregation an alternative to QPP?
Cost segregation is not a direct alternative but a complementary strategy. QPP applies to the building shell, while cost segregation identifies components within and around the building. Manufacturers should evaluate both and potentially use them together rather than viewing them as either/or choices.
Does QPP require an engineering study like cost segregation?
QPP does not legally require an engineering study, but many property owners commission QPP qualification studies to document compliance with IRS requirements. These studies are simpler than full cost segregation studies because they focus on the qualification tests rather than component-by-component analysis.
Which is more complex to implement, QPP or cost segregation?
Cost segregation is typically more complex because it requires detailed component identification, engineering analysis, and creation of detailed asset listings. QPP is simpler because it applies to the building as a whole, but still requires documentation of qualifying use and structural integration.
Can any building qualify for both QPP and cost segregation?
Only manufacturing or production buildings can qualify for QPP. Cost segregation can be performed on any commercial property type. A qualifying manufacturing building can benefit from both: QPP for the structure and cost segregation for personal property and land improvements.
How does bonus depreciation interact with QPP vs cost segregation?
Both QPP-eligible buildings and cost segregation-identified components can qualify for bonus depreciation if they meet the placed in service requirements. QPP allows bonus on the entire building structure, while cost segregation allows bonus on personal property and qualified improvement property components.
Which strategy has better IRS acceptance, QPP or cost segregation?
Both are accepted IRS positions when properly documented and supported. QPP is a statutory classification with clear guidance in Notice 2016-16. Cost segregation is supported by IRS audit guides and decades of court cases. Proper documentation is critical for both.
Should manufacturers always consider both QPP and cost segregation?
Yes, manufacturers with qualifying production buildings should evaluate both strategies. The analysis should compare QPP-only, cost segregation-only, and combined approaches to determine which delivers the greatest tax benefit for the specific property and tax situation.