Bonus Depreciation for a New Factory

The newly introduced provisions under IRC 168(n) present an exciting opportunity for manufacturers considering the construction or acquisition of production facilities. This section enables 100% bonus depreciation for “Qualified Production Property.” In plain terms, this means manufacturers can fully deduct the cost of eligible factories in the first year the facility is placed in service. This is a significant shift from standard tax rules, which require buildings to be depreciated over 39 years.

To qualify, the property must be domestic, with its original use commencing with the taxpayer, and it must serve as an integral part of a production activity. “Production activity” is broadly defined to include manufacturing or refining that results in a substantial transformation of the product’s components. For a facility to be eligible, construction must begin between January 19, 2025, and January 1, 2029, and the facility must be placed in service before January 1, 2031. However, not all portions of a building will qualify: spaces used for offices, parking, sales, research, or other non-production purposes are excluded. Taxpayers will likely need to conduct cost segregation studies to substantiate portions of a property qualify for full expensing.

While new construction is the clearest fit for this incentive, the statute does not exclude existing structures, and there are limitations to be aware of. For an existing structure newly acquired by the taxpayer, the property must not have been used for production activity between January 1, 2021, and May 12, 2025. For example, a shuttered office building or a shopping mall may qualify, but a factory that ceased operations in 2022 would likely not. The new law even indicates that additions to an existing operation could qualify if they constitute a “substantial transformation”. We await guidance from Treasury on what would qualify under this rule.

The goal of the legislation is clear: to provide robust incentives for opening new manufacturing facilities in the United States. Manufacturers interested in leveraging these tax benefits have approximately three and a half years from the bill’s enactment to begin construction. For more information or guidance on how your business might benefit from IRC 168(n), contact our team of tax professionals: we’re here to help you maximize your opportunities in this new era of domestic manufacturing.