Manufacturing Tax Break: How ‘Qualified Production Property’ Can Boost Metal Investments

The American manufacturing sector is experiencing a renaissance, fueled by innovative tax incentives designed to encourage domestic production and investment. One of the most significant of these is the concept of “Qualified Production Property” (QPP), a provision that can substantially benefit businesses involved in metal investments and manufacturing. By understanding how QPP works, businesses can strategically leverage it to reduce their tax burden, freeing up capital for growth and innovation.

Understanding Qualified Production Property (QPP)

The One Big Beautiful Bill Act (OBBBA) introduced a new category of real estate eligible for 100% bonus depreciation: Qualified Production Property (QPP). Codified under IRC §168(n), QPP is designed to incentivize investment in U.S. manufacturing and production infrastructure.

QPP refers to nonresidential real property that meets specific criteria:

Nonresidential Real Property: It must be a building or structure that is not used for residential purposes.
Qualified Production Activity: The property must be used as an integral part of a qualified production activity, which includes manufacturing, production, or refining of tangible personal property. Examples of qualifying activities include converting wood pulp into paper, machining steel rods into screws and bolts, and processing, canning, and selling fish.
U.S. Location: The property must be placed in service within the United States or any possession of the United States.
Original Use: The original use of the property must begin with the taxpayer. If previously owned, it must meet specific criteria related to prior use.
Construction Timeline: Construction must begin after January 19, 2025, and before January 1, 2029.
Placed in Service Date: The property must be placed in service before January 1, 2031.

Activities That Do Not Qualify:

It’s important to note that certain activities do not qualify for the QPP deduction. The nonresidential property must not be used substantially for:

Office and administrative functions
Lodging
Parking
Sales activities
Research activities
Software development
Engineering activities
Preparation and sale of food and beverages in the same building as a retail establishment
Any other functions unrelated to the manufacturing, production, or refining of tangible personal property

How QPP Boosts Metal Investments

The QPP provision offers a powerful incentive for metal manufacturers and investors to expand or upgrade their facilities. By classifying a manufacturing facility as QPP, businesses can deduct the full cost of the property in the year it’s placed into service, rather than depreciating it over a longer period (typically 39 years for nonresidential real property). This accelerated depreciation can result in significant tax savings, improving cash flow and making investments in new equipment and facilities more financially feasible.

Example:

Imagine a metal fabrication company invests in a new facility for producing specialized components for the aerospace industry. If the facility qualifies as QPP, the company can deduct the entire cost of the building in the first year, significantly reducing its taxable income. This tax break can then be reinvested into the business, funding further expansion, research and development, or employee training.

Maximizing the Benefits of QPP

To fully capitalize on the QPP deduction, businesses should:

Carefully Plan Capital Expenditures: Reassess all planned capital expenditures, including new facilities and equipment, to align with the QPP eligibility criteria.
Segregate Functional Space: In architectural plans, clearly distinguish qualifying and non-qualifying areas to maximize the portion of the property that qualifies for the deduction.
Document Construction Timelines and Costs: Maintain detailed records of construction timelines and costs to establish compliance with the start-date and placed-in-service requirements.
Consider a Cost Segregation Study: For new construction projects, a comprehensive cost segregation study can accurately delineate qualifying QPP costs from non-qualifying elements, maximizing the available deduction.
Consult with a Tax Professional: Seek guidance from a qualified tax advisor to ensure compliance with all requirements and to develop a tax strategy that optimizes the benefits of QPP.

Other Relevant Tax Incentives for Manufacturers

In addition to QPP, several other tax incentives can benefit metal manufacturers and investors:

Advanced Manufacturing Investment Credit: Established by the CHIPS Act, this credit provides a 25% tax credit for qualified investments in advanced manufacturing facilities, particularly those involved in semiconductor manufacturing. Starting in 2026, the credit will increase to 35%.
Research and Development (R&D) Tax Credits: These credits incentivize innovation by allowing companies to claim a percentage of their R&D spending as a tax credit.
Bonus Depreciation: This allows businesses to immediately deduct a large percentage of the purchase price of eligible assets, such as machinery and equipment, rather than depreciating them over their useful life. The One Big Beautiful Bill Act permanently restores the 100% deduction.
Section 179 Deduction: This allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year, up to certain limits. For 2025, the maximum deduction limit is $1,250,000, and the maximum total purchase limit is $3,130,000.
State-Level Incentives: Many states offer their own tax credits and incentives to promote manufacturing investments, including sales tax exemptions, investment tax credits, and property tax abatements.

Tax Implications of Precious Metal Investments

While QPP focuses on manufacturing facilities, it’s also important to understand the tax implications of investing in precious metals themselves:

Capital Gains Tax: When you sell precious metals at a profit, the profit is subject to capital gains tax. The tax rate depends on how long you held the metals and your income bracket.
Long-Term vs. Short-Term Gains: If you hold the precious metals for more than one year, the profits are considered long-term capital gains, which are taxed at a maximum rate of 28% because precious metals are classified as collectibles by the IRS. If you hold them for one year or less, the profits are considered short-term capital gains and are taxed at your ordinary income tax rate.
Precious Metals in IRAs: A Precious Metals IRA allows for gold, silver, and other metals to be held within a retirement account, offering similar tax advantages to traditional IRAs.
Reporting Requirements: When you sell precious metals, you are required to report the transaction on your tax return. Dealers are required to issue Form 1099-B to the IRS and the seller if the sale meets certain conditions.

Conclusion

The “Qualified Production Property” tax break represents a significant opportunity for businesses involved in metal investments and manufacturing. By understanding the eligibility requirements and strategically planning their investments, companies can leverage this provision to reduce their tax burden, improve cash flow, and drive growth. Combined with other federal and state tax incentives, QPP can help revitalize the American manufacturing sector and ensure its competitiveness in the global economy. However, it’s crucial to consult with a qualified tax professional to navigate the complexities of these incentives and develop a tailored tax strategy that maximizes their benefits.