The guidance specifies several types of ineligible property, such as:
• Offices
• Administrative services
• Lodging
• Parking
• Sales activities
• Research activities
• Software development or engineering activities
• Other functions unrelated to a QPA
• Property used to store finished products building where it will be sold). The guidance explains“ substantial transformation” refers to the further manufacturing, production or refining of the constituent elements, raw materials, inputs or subcomponents into a final, complete and distinct item of property that’ s fundamentally different from those original elements, materials, inputs or subcomponents.
The IRS guidance is somewhat broad, noting a QPA can include“ essential activities” critical to the completion of the product( for example, the receiving and storage of raw materials or other inputs to be used or consumed during a QPA). A QPA also includes certain related activities, such as oversight and direction of the manufacturing, production or refining activities that result in the substantial transformation of a qualified product.
The guidance includes specific definitions for“ manufacturing,”“ production,”“ refining” and other important terms. Notably,“ production” is limited to activities in the agricultural or chemical industries.
More to Know
Under the guidance, taxpayers may use any reasonable method to allocate a property’ s unadjusted depreciable basis between eligible property and ineligible property. Reasonable methods may include:
• The use of square footage
• Cost segregation data
• Architectural or engineering plans
• Process diagrams
• Construction invoices
Taxpayers can also use any reasonable method to allocate the basis for“ dual-use infrastructure” that serves both eligible property and ineligible property( such as an HVAC or sprinkler system).
Identifying QPAs
A QPA is the manufacturing, production or refining of a qualified product that results in a“ substantial transformation” of the qualified product( generally, any tangible personal property except a food or beverage prepared in the same
The interim guidance also includes special rules, election procedures and a safe harbor for property placed in service in 2025— as well as information about how depreciation must be recaptured and included in ordinary income if a QPP change in use occurs within 10 years after the property is placed in service.
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