The One Big Beautiful Bill Act (OBBB), signed into law on July 4, 2025, ushered in several significant tax policy changes impacting manufacturers. Particularly noteworthy among these provisions is the introduction of accelerated depreciation for manufacturing real property, a measure designed to stimulate domestic production and increase cash flow for capital-intensive businesses. As such, the accelerated depreciation translates into strategic opportunities for manufacturers in 2025 and beyond.
What Is Accelerated Depreciation Under the OBBB?
At its core, accelerated depreciation allows businesses to deduct the full cost of qualifying property in the year it is placed in service, rather than spreading the deduction over decades. Per the OBBB, this applies to a new category called Qualified Production Property (QPP), which includes nonresidential real property used in manufacturing, production or refining activities located and placed in service in the United States. This is the first time real estate has ever been eligible for accelerated depreciation under the U.S. tax code.
Previously, such real estate was subject to a 39-year depreciation schedule. Now, if certain conditions are met, manufacturers can expense the entire cost of a new facility in the first year, which can free up cash for further growth opportunities.
What Are the Requirements to Qualify?
To benefit from accelerated depreciation under the OBBB, manufacturing real property must meet several strict criteria. Firstly, taxpayers must elect to treat the property as QPP under Section 168(n). Only owner-occupied facilities qualify, and leased buildings are excluded. Construction on the property must begin after Jan. 19, 2025, and before Jan. 1, 2029, and it must be placed in service prior to Jan. 1, 2031. The property must also be originally used by the taxpayer for a Qualified Production Activity (QPA). If that is not the case, the property could still qualify if it has not been used in a QPA since Jan. 1, 2021, and was not previously used by the taxpayer or a related party.
By definition, a QPA includes manufacturing, production or refining of tangible personal property, and activities must result in a substantial transformation of the property. Portions of the building that are used for non-production purposes, such as offices, research and development (R&D) or sales, are excluded. Because of this restriction, businesses should carefully document and segregate costs to isolate qualifying areas.
What Are the Strategic Implications for Manufacturers?
- Cash Flow Optimization – Immediate expensing of real estate and equipment can result in hundreds of thousands of dollars in first-year tax savings. For example, a $5 million facility placed in service in 2026 could yield up to $1.5 million in federal tax savings at a 30 percent effective rate.
- Improved ROI and Payback Periods – By front-loading deductions, manufacturers can shorten payback periods and boost internal rates of return, making previously marginal projects financially viable.
- Capital Planning Certainty – The permanence of equipment expensing and the defined window for real estate deductions provide clarity for long-term planning. Manufacturers can confidently initiate projects without fear of midstream legislative changes.
- Encouragement to Reshore – The bill incentivizes domestic production and R&D, encouraging companies to bring operations back to the U.S. and invest in local infrastructure.
Challenges and Planning Considerations
While the benefits can be substantial, manufacturers should remember to always maintain accurate records and documentation of construction dates, usage and acquisition contracts with any QPP real estate to prove the property qualifies for the accelerated depreciation. Facilities with any mixed-use areas must also allocate costs precisely to avoid disqualification; in many instances, a cost segregation can greatly help manufacturers understand these allocations.
Timing is also important, since if the property ceases to be used in a QPA within 10 years, the taxpayer must recapture the expensed amount as if deemed sold, which could trigger a tax liability at ordinary tax rates. In addition, if the property is sold, the sale will be subject to tax at ordinary rates, up to the original purchase price of the property. This may lead to a considerably higher tax liability at sale than without the Section168(n) election. It is also important to note that not all states will conform to the OBBB. Many states already do not conform to the bonus depreciation rules under Section 168(k); therefore, it is unlikely to expect that they will conform to Section 168(n) as well.
Windham Brannon Can Help
Regulations specific to Section 168(n) are not yet finalized and may not be for quite some time. Given the time-sensitive nature of the accelerated depreciation provision, early planning is essential alongside a qualified tax professional, particularly if you’re considering cost segregation studies, a review of R&D activities or model tax scenarios to determine what best aligns with projected income and your tax strategy. Windham Brannon’s Tax Practice professionals can provide the right guidance and preparation so your manufacturing business can determine the right opportunities for your tax strategy with potential QPP real estate. For questions or more information, contact your Windham Brannon advisor today, or reach out to Nicole Suk.
