Qualified Production Property in the OBBB, 'should have seen it comin'
- James Peacock
- Apr 15
- 4 min read
This was first released on LinkedIn
Founder J Peacock Cost Seg Advisors, LLC
July 8, 2025
Edited Aug 5, 2025 added #'s
As I have completed my decades long carrier at the IRS, I have to say it pays to be a bit of a historian … well for various code sections and regulations of the IRC anyway.
Case in point, the new subsection IRC Sect. 168(n) for Qualified Production Property, has similar qualities of what constituted Other Tangible Property (OTP) for the old (some would say the Original or “OG”) Investment Tax Credit (ITC). It also has qualities for previously allowed building improvements to be included in the 100% bonus depreciation claimed.
I will give a not-so-brief but “highlights only” background on why I see these as similar.
First OTP from previous law - ITC was in IRC Section 38 at the time. It allowed a 30% of qualifying asset basis as a credit to federal tax owed that was allowed for specific property placed in service by the Taxpayer. It had to meet certain criteria and was primarily for tangible personal property (TPP), other tangible property (OTP), and some other listed properties in the regulation. This was in the PRE- MACRS days. Yes! the 1960’s, 70’s and just over half of the 1980’s. This ITC was repealed by the Tax Reform Act of 1986 which brought us the accelerated cost recovery system, or ACRS. Yes, the first version of MACRS which assigned relatively short prescribed recovery periods for personal property - Section 1245 property, and it also prescribed relatively longer recovery periods for buildings and other long-lived property – Section 1250 property.
ITC was frequently litigated in various courts over the decades, just look as Chapter 6 D of the Cost Segregation ATG. The first case listed was decided in 1968 for property placed in service in 1962. And there are many cases concerning ITC listed in the ATG that goes deep into the 1990s. Well, the TRA 86 put an end to that… or so they thought.
Here is my interpretation of historical events - Due to the insistence of many taxpayers at the time of ITC's demise, along with their tax practitioners which had a lot of programs or spreadsheets - now called APPs - for the ITC calculations for their clients, focus was shifted from the ITC to finding Section 1245 property that was included in newly built and renovated buildings which had a long recovery period. (Yes, the dawn of cost segregation!) This is why a regulation of Code Sections long repealed and since rewritten, is still referenced to this day - Reg. Sect. 1.48-1 “Definitions of Section 38 Property”. It defines and discusses, among other things; Tangible Personal Property, Other Tangible Property, Integral Part, and Buildings and their structural components.
Fast forward to the OBBB just signed into law last Friday. (Happy belated 4th by the way!) Section 70307 introduces the New Section 168(n) Special Depreciation for something called “Qualified Production Property” (QPP). Among other requirements, QPP is that portion of any nonresidential real property NRRP (currently assigned a 39-year recovery period), located in the US including its possessions, and used by the taxpayer as an INTEGRAL PART of a qualified production activity, defined as manufacturing, production, or refining of a qualified product. Office space, administration, engineering, software and several other activities are listed as examples of activities that would not take place in QPP and would disqualify that NRRP from being QPP.
Integral Part was a base requirement to qualify as OTP as defined in Reg 1.48-1. To be OTP it had to be used as an integral part of a long list of specific activities which did include manufacturing, production and refining along with many other things, some done outdoors so a building was not involved. The “integral part of” requirement for QPP mimics the requirements for OTP.
Second – since the implementation of the original Section 168(k) Special or “Bonus’ Depreciation which was reserved strictly for certain Section 1245 property, specific defined improvements to existing NRRP were subsequently made eligible for the bonus even though they may be section 1250 property. For example, Qualified Leasehold Improvement Property (QLIP) was defined and became eligible for the bonus from 2004 thru 2017. Currently Qualified Improvement Property or QIP introduced by the PATH Act or 2015 has been the qualified building improvements eligible for the bonus.
There are other similarities was well but I will limit to these two for this writing.
Bottom line - history does tend to repeat itself in one form or fashion within the federal income tax realm. Just reading Reg 1.48-1, recent law, and the Cost Seg ATG this becomes apparent. Knowing the history of the various provisions can help our understanding of the reasons or intent for the provisions, and also to assist in implements a plan to deal with these law changes.
Edit: I should have added some #'s. Newbie mistake.
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