The Internal Revenue Code historically has not incentivized building facilities the same way it has incentivized investing in machinery.
Consider this: a Roanoke Valley manufacturing company spends $5 million constructing a production building, and the tax code tells the business to deduct it over 39 years — roughly $128,000 per year. The business takes on the financing risk, commits capital to the project, and is repaid by the tax code for that investment over nearly four decades.
The One Big Beautiful Bill Act changed that for businesses that qualify.
Under new Section 168(n) of the Internal Revenue Code, certain businesses can elect to deduct 100% of the eligible cost of qualified production property in the year the property is placed in service. Not over 39 years. Not over five years. In the year the facility opens.
This is a significant provision that is receiving far less attention than it deserves. It's narrow enough that generic coverage often glosses over the details, and the eligibility requirements matter. Before any business can know whether this applies, it has to understand what actually qualifies.
(For Virginia manufacturers, there is an additional wrinkle: Virginia does not conform with this provision, in the same way the Commonwealth does not conform to bonus depreciation. That does not eliminate the federal benefit, but it does mean the Virginia tax treatment has to be modeled separately.)
What This Is, and What It Isn't
This deduction is separate from the better-known bonus depreciation provisions that were also addressed under the OBBBA.
Standard bonus depreciation under Section 168(k) generally applies to tangible personal property: equipment, machinery, vehicles, and similar assets with a recovery period of 20 years or less. It has not applied to production facilities, which are generally treated as nonresidential real property with a 39-year tax life.
Section 168(n) is different. It extends immediate federal expensing to certain nonresidential real property used in a qualified production activity. In plain English, this can include the building itself — the structure, the walls, the roof, and the production floor — if the eligibility requirements are met.
The two provisions can work together. A business building a new production facility might expense the eligible portion of the building under Section 168(n) and expense the equipment inside it under Section 168(k) bonus depreciation. For a qualifying project, that can materially change the federal tax result in the year the facility is placed in service.
That matters for manufacturers, fabricators, assemblers, food processors, and other production businesses across Virginia that are thinking about expansion, relocation, or ownership of a new facility.
Who Qualifies
The statute uses the term "qualified production property" (QPP) to define what's eligible. There are several requirements that must all be satisfied.
The property must be nonresidential real property. This provision is specifically for buildings and structures, not equipment or personal property.
Construction must begin after January 19, 2025 and before January 1, 2029. The construction start date is the gating requirement. Projects already underway or planned need to confirm their timeline falls within this window. The property must then be placed in service before January 1, 2031.
The original use must begin with the taxpayer. This is primarily a provision for new property. There is a narrow exception for certain used property that was not used in a qualified production activity during a specified prior period, but new construction is the cleaner and more straightforward fact pattern.
The property must be used as an integral part of a qualified production activity. This is where the analysis gets more interesting, because the statute defines qualified production activities specifically: manufacturing, production, or refining of tangible personal property. Businesses that transform raw materials or components into a finished product are the target of this provision.
What Counts as a Qualified Production Activity
The statute covers manufacturing, production, and refining of tangible personal property in the United States. In practice, this is broader than it might sound at first read.
A company that fabricates metal components may qualify. A plastics manufacturer may qualify. A chemical producer or refiner may qualify. A business that assembles products from components may qualify. A commercial food processor may qualify.
What it does not cover: pure distribution, warehousing, software development, research and development, professional services, sales activity, or administrative functions. The activity has to involve the physical transformation of tangible goods.
For businesses that operate across multiple functions, only the portions of the facility directly used in the production process qualify for the deduction. The production floor qualifies. The attached warehouse might not. The executive offices don't.
This means the analysis isn't simply "Do we manufacture something?" It requires a careful look at how the facility is actually used and documenting which square footage is integral to the production process.
The Math on a Real Project
To understand why this matters, consider a business planning a $4 million production facility — a new building for a manufacturing operation that currently leases space and is ready to own.
Under prior law, that $4 million would be depreciated over 39 years. Annual deduction: approximately $103,000. At a federal effective tax rate of 28.5%, that's roughly $29,000 in annual tax deferral. (Remember, Virginia and many other states do not conform to this provision.)
Under Section 168(n), assuming the facility qualifies and is placed in service within the window, the entire $4 million is deductible in year one.
The difference isn't just the amount — it's the timing. $1.14 million of tax deferral in the year the facility opens changes the ROI calculation, the financing conversation, and potentially the decision of whether to build at all. Money that would have been paid to the IRS over four decades is available to reinvest in the business in year one.
This is the kind of provision that doesn't just affect the tax return. It affects capital allocation decisions.
What This Means for the Financing Conversation
A common question when this provision comes up: does the deduction make it easier to get a loan?
The direct answer is no, or at least, not automatically — banks don't lend against tax deductions. A lender is underwriting against cash flow and collateral, and a first-year deduction doesn't change the appraised value of the building, project risk, or the business's EBITDA or discretionary cash flow.
But the indirect answer is more interesting, and it's a conversation most borrowers aren't having with their lenders.
A large federal tax deferral can improve after-tax liquidity in the year the facility opens. That may affect how much cash the business has available for working capital, reserves, equipment, owner equity, or project contingencies. It may also reduce the net cash strain of the project compared to a scenario where the building is depreciated over 39 years.
Additionally, for a business that was planning to borrow the full cost of a project, the first-year tax deferral may reduce the net capital required. A business that can fund $1 million of a $4 million project from tax deferral it wouldn't otherwise have had is a different underwriting decision than one borrowing the full amount.
The tax analysis and the financing conversation should be happening in the same room, at the same time, before the project breaks ground. In most cases, they aren't.
None of this means a lender will approve a project that doesn't otherwise work. What it means is that a well-prepared borrower — one whose advisor has modeled the after-tax project economics and translated them into the language a bank understands — is in a stronger position than one who walks in with a construction budget and a business plan.
The Recapture Rule
One provision deserves attention before anyone commits to claiming this deduction.
If qualified production property stops being used as an integral part of a qualified production activity within 10 years of being placed in service, the recapture rules can apply. In general, the property may be treated as if it were disposed of when it is first used in an activity that is not a qualified production activity, and ordinary income may be recognized based on the difference between the property's recomputed basis and adjusted basis.
In plain English: if the business takes the deduction and then the facility stops being used for qualified production within the 10-year period, part of the benefit may be clawed back as ordinary income.
This creates a real planning consideration for businesses that may pivot, sell, lease the facility, relocate operations, or significantly change how the building is used within a decade of placing it in service.
For a stable operating business with a clear production function, this may not be a major concern. For a business with an uncertain runway, possible sale, or flexible future use of the property, the recapture risk needs to be modeled before the deduction is claimed.
What This Means for Virginia Manufacturers
For businesses in Lynchburg, Bedford, and Roanoke that qualify, Section 168(n) may change several conversations that were already considered settled.
A facility expansion that was deprioritized because the after-tax return didn't justify the capital outlay looks different when the building is fully expensed in year one. A business that was planning to lease rather than own because of the tax inefficiency of building ownership may want to revisit that analysis. A company that has been operating out of a facility it has outgrown but hasn't replaced may find that the economics of building now are substantially more favorable than they were two years ago.
The construction start date window — ending January 1, 2029 — means there is time to plan, but not unlimited time. For larger projects with longer design and permitting timelines, the 2029 start date is closer than it appears.
The first step is determining whether the business's primary activity qualifies as manufacturing, production, or refining of tangible personal property. If it does, the next step is a careful analysis of which portions of a planned or existing facility expansion would qualify, and what the first-year deduction would actually mean for cash flow and investment return.
This is not a provision for every business. But for the businesses it covers, it is one of the most significant capital investment incentives in the tax code in decades — and most of them haven't had the conversation yet.
