100 % Bonus Depreciation on Qualified Production Property

What is “Qualified Production Property”

Qualified Production Property is property that meets all of the following criteria:

• It is new, nonresidential real property,
• It is constructed by the taxpayer,
• It is placed in service in the United States, and
• It is directly integral to a qualified production activity (defined below)

Important Limitations:

• No leasing to unrelated parties: Property leased to unrelated third parties does not qualify – even if the taxpayer owns the property – unless the taxpayer is the one performing the production activity.
• Exclusions for support functions: Property used for the following does not qualify, even if located on or adjacent to a production facility:
  • Office space
  • Administrative and support services
  • Sales or customer service centers
  • Research and development facilities
  • Software engineering or data centers
  • Lodging (hotels, etc.)
  • Parking

What is a “Qualified Production Activity?”

Qualified production activities generally include operations that involve the substantial transformation of tangible property. The activities include:

• Manufacturing
• Production, limited to agricultural and chemical production
• Refining, but only where the process results in a substantial transformation of a qualified product
  • Qualified products include all tangible personal property, with one notable exclusion: Food or beverages prepared in the same building as the retail establishment where they are sold (e.g., in-store bakeries or restaurants) are not considered qualified products.

Alternative Minimum Tax (AMT) Adjustment

Bonus depreciation claimed on Qualified Production Property is not subject to an AMT adjustment.

Depreciation Recapture Rules

Generally, Section 1250 of the Internal Revenue Code governs depreciation recapture for nonresidential real property. However, Qualified Production Property is subject to the recapture rules under Section 1245.

Under Section 1245, depreciation recapture requires the taxpayer to recognize ordinary income upon the sale of the property, equal to the amount of bonus depreciation previously claimed.

Additionally, for Qualified Production Property, recapture can also be triggered by a change in use within ten years after the property is placed in service. In such cases, the property is treated as if it were disposed of on the date it ceases to be used in a qualified production activity. This results in recognition of ordinary income equal to the amount of bonus depreciation previously taken.