Section 168(n) Special Depreciation for Qualified Production Property
As part of the One Big Beautiful Bill Act (the “OBBBA”), signed into law on July 4, 2025, Congress enacted a new provision under Internal Revenue Code Section 168, which permits taxpayers a 100% special depreciation allowance for qualified production property (“QPP”) used as an integral part of a qualified production activity (“QPA”) with the deduction generally allowed in the year the property is placed in service.
While Section 168(n) offers the potential for immediate and significant deductions, eligibility depends on a careful factual analysis, documentation, and ongoing compliance over a lengthy recapture period.
QPP and QPA
QPP includes the portion of any nonresidential real property placed in service in the U.S. or a U.S. territory that is used by the taxpayer as an integral part of a QPA. However, QPP does not include portions of property used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other functions unrelated to the manufacturing, production, or refining of tangible personal property. The original use of the QPP must begin with the taxpayer, unless the used property exception applies. Construction must begin after January 19, 2025, and before January 1, 2029, and the property must be placed in service after July 4, 2025, and before January 1, 2031.
A QPA is the manufacturing, production, or refining of a qualified product that results in a “substantial transformation” of the property making up the product. “Production” includes only agricultural and chemical production, and a “qualified product” is any tangible personal property, excluding food or beverage prepared and sold on-site.
Integral Part
To qualify, QPP must be used as an integral part of a QPA. This requirement is satisfied if a QPA is conducted in the physical space or portion of the property. Each unit of property is tested separately unless the property qualifies as part of an “integrated facility”. An integrated facility encompasses multiple properties operating together and physically located or co-located on contiguous land.
Taxpayers may also rely on a 95% de minimis rule, under which an entire property may be treated as qualifying if at least 95% of its physical space satisfies the integral‑part standard on the placed‑in‑service date.
Basis Allocation Considerations
Because many production facilities include both qualifying and non‑qualifying space, Section 168(n) expressly permits taxpayers to use any reasonable method to allocate unadjusted depreciable basis. Acceptable approaches may include:
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- Square‑footage allocations;
- Cost‑segregation studies;
- Engineering and architectural plans; and
- Construction invoices and process flow diagrams.
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Multiple reasonable methods may be used for different components of the same property if using a single method would not properly allocate basis.
Election Mechanics
The election is made on the taxpayer’s timely-filed federal income tax return for the taxable year the property is placed in service, and the taxpayer must identify the relevant nonresidential real property and the portion designated as QPP. Absent further guidance or consent, the election is generally irrevocable.
Section 1245 Recapture
QPP is treated as Section 1245 property and as a result, ordinary income recapture rules apply on a sale or other disposition under Section 1245. Additionally, under Section 168(n), there is a 10‑year recapture period if QPP ceases to be used as an integral part of a QPA and is instead used in another productive use at any time during the recapture period.
Partial changes in use may trigger proportionate recapture based on the percentage of affected property.
Conclusion
Section 168(n) presents a great opportunity for immediate expensing of qualifying production property, but it requires careful preparation, documentation, and continued monitoring during the 10-year recapture period.
For more information on Section 168(n) and to discuss how this may impact your corporate tax matters, please contact Nate M. Johnson at (614) 744-2931 and/or any of the tax attorneys at Dickinson Wright.
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Nate Johnson (Associate, Columbus) is a member of the firm’s corporate group. He concentrates his practice on private equity, mergers and acquisitions, general corporate law, and transactional tax matters.