What is § 168(n) under OBBB?
The One, Big, Beautiful Bill (Public Law 119-21) added IRC § 168(n), which provides a special first-year depreciation allowance (100%) for qualified production property (QPP) placed in service after July 4, 2025. This is a major change from the gradual phase-downs of earlier depreciation rules. (irs.gov)
Who qualifies as “Qualified Production Property”?
To qualify under § 168(n), property must satisfy several requirements:
- Be nonresidential real property used in a trade or business, under normal MACRS rules. (irs.gov)
- Be used as an integral part of a qualified production activity (QPA) as defined in the law. Examples include manufacturing, processing, producing tangible personal property, etc. (irs.gov)
- Construction must begin after January 19, 2025 but before January 1, 2029. Property must be placed in service after July 4, 2025 and before January 1, 2031. (irs.gov)
- The property must be original use by the taxpayer unless certain used property meets special rules about prior use between Jan 1, 2021 and May 12, 2025. (irs.gov)
How to elect and apply the allowance
- Taxpayers must designate property as QPP via a formal election under § 168(n) in their tax return. (irs.gov)
- Once elected, you can deduct 100% of the adjusted basis as a depreciation deduction in the first tax year. Subsequent depreciation for that property begins from a basis reduced by that deduction. (irs.gov)
Recapture and change in use
If at a later date the property ceases to be used as part of a QPA (e.g., converted to a different use), then depreciation recapture rules will apply, possibly treating part of it as newly placed in service with a recomputed basis. (irs.gov)
Practical examples
- A manufacturer builds a plant beginning construction in September 2025, places it in service in mid-2026. If qualifies as QPP, they may deduct full cost in 2026 instead of depreciating over 39 years.
- If only part of factory square footage is used for production (rest for office), allocate basis (using square footage or cost allocation) to eligible portion. Election and partial basis allowed. (irs.gov)
Actionable insights
- Review upcoming or recent capital projects to see if their construction timeline fits between the eligible windows (after Jan 19, 2025 to Jan 1, 2029).
- Use proper documentation (cost segregation, engineering plans) to support elections and component classification.
- Track property changes and usage so once use changes, you can handle recapture properly.
- Coordinate with tax advisors and ensure your returns include the proper election.