What Is Qualified Production Property (QPP)?

Qualified Production Property refers to a specific category of real property under Section 168(e)(3)(E) of the Internal Revenue Code that receives accelerated depreciation treatment. QPP is manufacturing or production real property that qualifies for a 20-year MACRS recovery period, rather than the standard 39-year life for nonresidential real property. This classification creates substantial tax benefits for owners of qualifying manufacturing facilities.

The definition of QPP for manufacturers requires the property to be an integral part of a manufacturing, production, or extraction activity. The building must be used directly in the production process, not merely for administrative, sales, or warehousing functions. IRS guidance clarifies the structural and operational requirements that determine whether a facility qualifies for this favorable depreciation treatment.

This article focuses specifically on QPP under federal tax code and how it differs from other accelerated depreciation methods. For strategies that can be combined with QPP, property owners should also explore component-level depreciation acceleration techniques.

QPP treatment was established through legislative changes to accelerate depreciation for domestic manufacturing facilities. The provision recognizes that production buildings experience functional obsolescence faster than general commercial real estate due to evolving manufacturing processes, equipment integration requirements, and industry-specific operational demands.

The Tax Cuts and Jobs Act of 2017 modified the placed in service date requirements and bonus depreciation interaction for QPP. Properties placed in service after December 31, 2017, became eligible for both the 20-year recovery period and 100% bonus depreciation (phasing down in later years), creating significant first-year deduction opportunities for manufacturers.

IRS Qualified Production Property guidance was formalized through Notice 2016-16, which provides the technical framework for determining eligibility, calculating the required production use percentage, and documenting compliance. Understanding this guidance is essential for property owners considering QPP treatment.

To qualify as QPP, property must meet several core requirements. First, it must be nonresidential real property as defined under Section 168(e)(2)(B). Second, it must be used in a manufacturing, production, extraction, or furnishing of certain utilities. Third, a specified percentage of the building must be used for qualifying production activities, as opposed to administrative or support functions.

The structural requirement is critical to the QPP explanation. The building itself must be integral to the production process. This means the structure is designed, constructed, or substantially modified to support manufacturing operations. Generic warehouse or office buildings that happen to be located on a manufacturing campus do not qualify unless they meet the functional integration and use percentage tests.

Required Elements for QPP Classification

• Property Type: Must be nonresidential real property (building structure and certain improvements).
• Qualifying Activity: Used for manufacturing, production, extraction, or qualifying utility operations.
• Use Percentage: Meets the minimum percentage threshold for production use as specified in IRS guidance.
• Placed in Service Date: Property must be placed in service after December 31, 2017.
• Documentation: Adequate records to support the QPP classification and use allocation.

Qualified Production Property tax law applies to manufacturing facilities, food processing plants, assembly operations, production of electricity or natural gas, and certain extraction facilities. The key distinction is that the building must be used in the actual production process, not support functions that could occur in any commercial building.

Examples of qualifying property include production floors in manufacturing plants, processing areas in food production facilities, assembly bays in fabrication operations, and production-related utilities infrastructure. Structures that house production equipment and are designed to accommodate the operational requirements of the manufacturing process typically qualify.

The primary tax benefit of QPP is accelerated depreciation through a 20-year recovery period instead of 39 years. This acceleration shifts deductions into earlier years, improving cash flow and reducing current tax liability. The 20-year life nearly doubles the annual depreciation deduction compared to standard nonresidential real property treatment.

When combined with bonus depreciation, QPP creates substantial first-year deductions. For property placed in service when 100% bonus depreciation was available, the entire depreciable basis of the QPP structure could be deducted in year one. Even as bonus depreciation phases down, the combination of bonus and accelerated recovery creates significant timing benefits.

The value of QPP treatment is greatest for businesses with taxable income to offset, long-term operational plans for the facility, and substantial depreciable basis. Manufacturers with high marginal tax rates and capital-intensive production facilities see the most benefit from the accelerated deductions.

QPP differs from standard depreciation by reclassifying the entire building structure to a shorter recovery period. Unlike cost segregation, which identifies specific components for accelerated depreciation, QPP applies to the real property as a whole. This makes QPP simpler to implement but potentially less granular than a component-based cost segregation study.

QPP is a statutory classification based on use and structural characteristics, while cost segregation is an engineering analysis based on component function and legal precedent. Both methods accelerate depreciation, but they operate through different mechanisms and can be combined for maximum benefit on qualifying properties.

QPP vs Standard Depreciation

• Recovery Period: 20 years for QPP vs 39 years for standard nonresidential real property.
• Qualification Basis: Use and structural requirements for QPP vs general real property classification.
• Documentation: QPP requires evidence of qualifying use and compliance with IRS guidance.
• Bonus Depreciation: QPP-eligible property qualifies for bonus depreciation on the entire structure.

Implementing QPP treatment requires coordination with your CPA and potentially an engineering analysis to document compliance. The first step is determining whether the property meets the qualifying use and structural requirements. This involves reviewing building plans, operational processes, and use allocations to confirm the property is integral to production.

Once eligibility is confirmed, the property owner must affirmatively elect QPP treatment on the tax return. The election is made by reporting the property with a 20-year recovery period on Form 4562. Documentation should include engineering or architectural support demonstrating that the building meets the IRS Qualified Production Property guidance requirements.

For detailed information on eligibility criteria and compliance requirements, see the article on QPP Eligibility Requirements Explained. That article addresses the specific tests and documentation needed to support a QPP position.