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By Lester Cook | Principal, Cost Segregation
Who Can Claim QPP? Why “Used by the Taxpayer” is the Next Big Test
IRC §168(n), introduced under the One Big Beautiful Bill Act, allows full expensing on certain real property used in qualified production. This new category is referred to as Qualified Production Property (QPP). A critical requirement is that QPP must be “used by the taxpayer.” This requirement complicates lease-backed and holding company ownership structures. Tax advisors should take notice, as misaligned structures could lead to disqualification from this valuable incentive.
KBKG Insight:
The term “used by the taxpayer” is not new. Treasury Regulation §1.481(b), originally applied to the investment tax credit under §48, defines it as use in a trade or business or for production of income. This interpretation helps clarify QPP eligibility: triple-net leases or passive holding company arrangements may fail the test, while related-party leases or partnerships where the taxpayer retains operational control may pass. That means the way a taxpayer structures real estate investments can directly determine eligibility for QPP Bonus Depreciation.
Background
QPP under §168(n) is a significant expansion of Bonus Depreciation to certain real property, as domestic manufacturers are now allowed to immediately expense qualified real property at 100%. Previously limited to tangible personal property and land improvements, this expansion now includes eligible non residential structures tied to production activities. Taxpayers can read more about QPP in KBKG’s recent post: How Manufacturers Can Now Fully Expense Their Facilities and Real Property.
How to Qualify:
- The asset must be nonresidential real property used in a qualified production activity. Only certain costs directly related to the production of “Qualified Production Property” may apply, meaning office area or parking garages, among other things, do not apply.
- It must be constructed after January 19, 2025, and before January 1, 2029, and placed in service before January 1, 2031.
- Original use must begin with the taxpayer, with certain exceptions for newly acquired unused property.
Planning Implications & Risks
Regulations specific to § 168(n) are not yet finalized and may not be for quite some time. Early reliance on § 1.48 1(b) is a pragmatic stopgap, but taxpayers should plan with flexibility, expecting further guidance from the IRS to refine what constitutes sufficient use or control.
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Planning Opportunity
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Details
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Lease Structuring |
Deployment of QPP to related entities without relinquishing the "used by taxpayer" status |
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Holding Company Structure |
Ensuring tax ownership remains aligned with QPP benefits, even when legal ownership is separated |
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Cost Segregation Studies |
Documenting and isolating portions of the real property that qualify as QPP |
Conclusion
The intersection of the new QPP provision under IRC § 168(n) and the longstanding “used by the taxpayer” standard from § 1.48 1(b) offers practical guidance during a period of regulatory evolution. Borrowing interpretive clarity from § 1.48 1(b) can enhance confidence in QPP planning, especially around ownership structures and leasing, but should be paired with vigilant monitoring of forthcoming § 168(n) regulations.
Action Steps
If CPAs or their client are planning real estate improvements tied to manufacturing or production, now is the time to review ownership and lease structures for QPP eligibility. A “QPP Cost Segregation Study” will shift more dollars to qualifying components for full expensing, so contact a KBKG expert today for a full evaluation.
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About the Author
Lester Cook | Principal – Cost Segregation
Lester Cook has over 25 years of experience in the tax specialty service industry. He is a Principal of KBKG’s Fixed Asset Review Practice. He is a certified member of the American Society of Cost Segregation professionals, a group that he has been a part of since 2008. Throughout his career, Cook has completed… Read More