OBBBA’s Qualified Production Property: Why Ecommerce Brands Building Warehouses Should Act Before 2028
The One Big Beautiful Bill Act (OBBBA) made 100% bonus depreciation permanent for equipment and machinery. That grabbed headlines. But OBBBA also introduced Qualified Production Property (QPP)—allowing certain facilities to be fully depreciated in year one instead of over 39 years.
For ecommerce brands building fulfillment centers, expanding into private label manufacturing, or constructing warehouses, this could mean immediate tax deductions worth millions. But QPP comes with strict qualification rules, tight deadlines, and serious recapture risks that could backfire if your business model changes.
What Is Qualified Production Property?
Under new Section 168(n), QPP allows businesses to immediately write off non-residential real estate used in qualified production activities. Instead of depreciating a $5 million warehouse over 39 years (~$128K annually), you deduct the entire amount in year one.
For profitable ecommerce brands, this creates massive tax savings when cash flow matters most—during expansion phases requiring significant capital deployment.
The potential impact:
– $5M warehouse facility
– 30% effective tax rate
– Traditional depreciation: ~$128K annual deduction ($38K tax savings)
– QPP treatment: $5M year-one deduction ($1.5M tax savings)
– Cash flow benefit: $1.46M additional cash in year one
What Qualifies as a Production Activity for Ecommerce?
This is where most ecommerce brands hit confusion. QPP requires use in a “Qualified Production Activity” (QPA)—defined as manufacturing, production, or refining of tangible personal property involving substantial transformation.
Clear qualifiers for ecommerce:
– Private label manufacturing facilities (producing your own products)
– Co-packing operations (assembling, mixing, combining components)
– Product assembly that substantially transforms materials
– Kitting and bundling that creates new SKUs from components
– Light manufacturing (cosmetics, supplements, food production)
Likely non-qualifiers:
– Pure fulfillment centers (picking, packing, shipping)
– Traditional warehousing (storage and distribution)
– 3PL operations (logistics without transformation)
– Returns processing facilities
– Standard ecommerce distribution centers
The IRS uses a “substantial transformation” test. Simply repackaging, relabeling, or quality-checking imported goods won’t qualify. You must be creating or substantially altering the product.
The Gray Area: Hybrid Facilities
Many modern ecommerce operations combine multiple functions in one facility:
Example: Supplements Brand
– 60% of facility: Mixing, encapsulating, bottling (likely qualifies)
– 20% of facility: Warehouse storage of finished goods (doesn’t qualify)
– 15% of facility: Fulfillment/shipping operations (doesn’t qualify)
– 5% of facility: Office space (doesn’t qualify)
Only the 60% production space qualifies for QPP. The brand needs defensible allocation methodology, likely requiring:
– Engineering studies
– Square footage analysis
– Time-and-motion studies
– Cost segregation analysis
Get this allocation wrong, and the IRS can disallow the entire QPP claim and assess penalties.
The Lease Structure Problem: Why Most Ecommerce Brands Won’t Qualify
Here’s the critical issue: The operating company must own the property. If you lease your facility—even from a related entity—QPP doesn’t work.
Common ecommerce structure that fails:
– Operating LLC (OpCo) conducts manufacturing
– Real estate LLC (PropCo) owns the building
– OpCo leases from PropCo (standard asset protection structure)
– Result: No QPP benefit despite production activity
This creates tension with typical tax and legal planning:
– Asset protection attorneys recommend separating real estate
– Estate planners use PropCo/OpCo structures for succession
– Lenders often require real estate isolation
Potential workarounds (awaiting IRS guidance):
– Section 469 passive activity grouping elections
– Qualified Business Income (QBI) aggregation elections
– Single-member LLC disregarded entity structures
The IRS hasn’t clarified whether these structures preserve QPP eligibility. Until they do, assume separate entity leasing arrangements likely don’t qualify.
Strict Timing Windows: The 2028 Deadline
Unlike permanent bonus depreciation for equipment, QPP is temporary
For new construction:
– Construction must begin after 2/5/2025
– Property must be placed in service before 1/1/2031
– Effective window: 2025-2030 for most projects
For existing property acquisitions:
– Property must be acquired after 2/5/2025
– Must be placed in service before 1/1/2028
– Effective window: 2025-2027 for acquisitions
Translation for ecommerce brands:
– Considering building a manufacturing facility? Start before 2028 to qualify. – Buying an existing warehouse to convert to production? Must close and occupy before 2028. – Planning a 2029 expansion? Won’t qualify for QPP.
The window is tighter than it appears. Construction projects take 18-24 months. If you’re exploring this in 2025, you need to move now.
What Doesn’t Qualify: Common Exclusions
Even qualifying facilities can’t claim QPP on all space. Excluded areas:
Clearly excluded:
– Executive offices and administrative space
– Showrooms and retail areas
– Meeting rooms and conference facilities
– Employee break rooms and cafeterias
Gray areas needing IRS guidance:
– Raw material storage (waiting for production)
– Finished goods storage (post-production)
– Quality control and testing areas
– Research and development sections
Conservative approach: Exclude anything not directly involved in the physical transformation process.
The 10-Year Recapture Trap
If you cease production activity within 10 years, the IRS treats the property as disposed under Section 1245, triggering recapture as ordinary income.
Example scenario:
– 2026: Built $8M manufacturing facility, claimed $8M QPP deduction ($2.4M tax savings at 30%)
– 2032: Pivoted to 3PL model, stopped manufacturing
– Result: $8M recapture income, $2.4M tax bill plus penalties and interest This recapture risk is severe for ecommerce brands because business models shift:
– Private label brand sells to strategic buyer who moves production
– Vertical integration experiment fails, outsource manufacturing
– Facility converts from production to pure fulfillment
– Economic downturn forces consolidation
Recapture triggers to consider:
– Sale of business (acquirer may not continue production)
– Lease to third party (tenant’s activity doesn’t count)
– Pivots to asset-light model (outsource manufacturing)
– Facility damage requiring prolonged closure
You’re making a 10-year operational commitment. For fast-moving ecommerce businesses, that’s risky.
Tax-Free Exchanges and QPP: Unanswered Questions
What happens in a 1031 like-kind exchange involving QPP property? The IRS hasn’t addressed:
– Does exchanging QPP property trigger recapture?
– Does replacement property qualify if boot is involved?
– How do mixed-use facilities affect exchange calculations?
Until the IRS provides guidance, assume QPP facilities cannot be 1031 exchanged without risk. This limits exit flexibility.
State Conformity: The Second Layer of Complexity
Most states already decouple from federal bonus depreciation. QPP falls under Section 168(n), and state conformity is unclear.
State considerations for ecommerce brands:
– California: Likely won’t conform (historical pattern)
– Texas: No income tax, but franchise tax implications
– Florida: May conform, but requires monitoring
– New York: Historically decouples from bonus depreciation
Multi-state ecommerce brands need parallel depreciation schedules:
– Federal: QPP immediate deduction
– State: 39-year depreciation
This means you need:
– State-by-state depreciation tracking
– Separate cost seg studies for state purposes
– Complex multi-year state tax projections
The compliance burden is substantial. Your monthly bookkeeper can’t handle this.
Real-World Scenarios: When QPP Makes Sense
Scenario 1: Supplements Brand Vertical Integration
– $15M annual revenue, strong margins
– Building $6M facility: bottling, encapsulating, labeling
– 75% production space, 25% warehouse/office
– QPP benefit: $4.5M immediate deduction ($1.35M tax savings at 30%) – Committed to in-house production for quality control
– QPP makes sense: High confidence in 10+ year production commitment
Scenario 2: Apparel Brand Manufacturing Expansion
– $25M revenue, currently outsourcing to overseas manufacturers
– Considering $10M US manufacturing facility
– Testing domestic production, uncertain long-term commitment
– 60% production, 40% storage/fulfillment
– QPP benefit: $6M deduction ($1.8M tax savings)
– QPP is risky: Business model uncertainty, recapture exposure high
Scenario 3: Food Brand Co-Packing Facility
– $40M revenue, currently using co-packers
– Building $12M facility: mixing, packaging, quality control
– PropCo/OpCo structure for asset protection
– QPP won’t work: Lease structure disqualifies, would need restructuring
Scenario 4: Beauty Brand Warehouse Conversion
– $8M revenue, leasing fulfillment center
– Wants to buy $4M existing warehouse, add light assembly
– Assembly adds finishing touches but limited transformation
– QPP probably won’t work: Activity likely insufficient for “substantial transformation”
Strategic Considerations Before Pursuing QPP
Factor 1: Business model stability
Are you committed to this production activity for 10+ years? If your strategy might pivot, recapture risk outweighs benefits.
Factor 2: Entity structure
Do you own the real estate in the operating entity? If not, can you restructure without disrupting banking, legal, or estate planning?
Factor 3: Growth trajectory
Does the tax savings justify complexity? A $2M facility may not warrant the engineering studies, legal structuring, and ongoing compliance.
Factor 4: Alternative uses
Could the facility operate as something else? If it’s a generic warehouse easily converted to fulfillment, recapture risk increases.
Factor 5: Financing
Does immediate depreciation help or hurt your lending relationships? Some lenders want to see book income, others prefer cash flow.
The Compliance Reality: What You Need
Successfully claiming QPP requires:
- Qualified intermediary analysis – Determining if your activity qualifies
- Engineering study – Allocating QPP vs. non-QPP space
- Cost segregation – Separating building components
- Entity structure review – Ensuring ownership qualifies
- State conformity analysis – Multi-state implications
- Recapture risk modeling – Long-term business planning
This isn’t bookkeeping. This requires:
– CPAs specializing in cost segregation
– Tax attorneys for entity restructuring
– Engineers for facility allocation
– Industry expertise in ecommerce operations
The cost: $15K-$50K depending on facility complexity. The payoff: Potentially millions in tax savings. The risk: Getting it wrong costs more than getting it right.
Filing Requirements and Timing
QPP is claimed via:
– Form 4562 (Depreciation and Amortization)
– Property listed in Part II
– Proper classification codes
– Basis calculations and allocations
Critical timing:
– Must claim in year property is placed in service
– Cannot amend to add QPP retroactively
– Requires contemporaneous documentation
If you build in 2026 and file your 2026 return in April 2027 without claiming QPP, you’ve lost the benefit permanently.
The Decision Framework
Step 1: Qualification assessment
Does your activity involve substantial transformation of tangible goods?
Step 2: Ownership verification
Does the operating entity own the real estate, or can you restructure?
Step 3: Timeline check
Can you begin construction and place in service within the statutory windows?
Step 4: Allocation analysis
What percentage of your facility qualifies? Is the benefit worth the complexity?
Step 5: Recapture modeling
How confident are you in 10 years of continued production activity?
Step 6: Cost-benefit calculation
Do tax savings exceed professional fees and ongoing compliance costs? All six must align favorably. Miss one, and QPP may not work for your situation. ## Interaction with Other Tax Incentives
QPP doesn’t exist in isolation. Consider coordination with:
Opportunity Zones:
Building in OZ may offer additional benefits, but timing complications
State and local incentives:
Many states offer credits for manufacturing facility investment
Research and Development credits:
Facility design and process development may qualify
Section 179D energy deduction:
Energy-efficient building components have separate deduction
Strategic planning coordinates all available incentives. Taking QPP shouldn’t preclude other benefits.
Action Steps for Ecommerce Brands
If you’re considering building or acquiring production facilities:
- Assess your timeline – Can you act before the 2028 deadline for existing property (2031 for new construction)?
- Evaluate your activity – Does your production involve substantial transformation, or just repackaging?
- Review your entity structure – Does your operating company own the real estate?
a. Model the numbers – Calculate potential tax benefit vs. compliance costs
b. Assess recapture risk – How certain is your 10-year production commitment?
c. Engage specialists – This requires cost segregation engineers and tax attorneys, not bookkeepers
The window is closing. If you’re planning 2026-2027 facility expansion, you need to act now to preserve QPP eligibility.
Why This Matters for Ecommerce Brands
Ecommerce is increasingly moving toward vertical integration:
– Private label manufacturing for margin protection
– Quality control through in-house production
– Supply chain resilience post-pandemic
– Speed to market through domestic production
As ecommerce brands mature from pure arbitrage or dropshipping into vertically integrated manufacturing, they’re making substantial facility investments. QPP makes these investments significantly more attractive from a tax perspective.
The difference between $128K annual depreciation and $5M immediate deduction isn’t just timing—it’s the cash flow that enables the next expansion, the inventory buy that captures seasonal demand, or the working capital that survives a downturn.
But unlike bonus depreciation for equipment (which most ecommerce brands already use), QPP for buildings is complex, risky, and requires sophisticated planning. The recapture provisions are unforgiving, the qualification standards are strict, and the compliance requirements are substantial.
The Bottom Line
QPP represents a powerful tax incentive for ecommerce brands building or acquiring production facilities—potentially converting multi-year depreciation into immediate cash flow. But it’s not for everyone.
The sweet spot: Established ecommerce brands making deliberate, long-term commitments to in-house production with clear substantial transformation activities and proper entity structures.
The danger zone: Brands experimenting with vertical integration, operating through lease structures, or unsure about 10-year operational commitments.
If you’re in the sweet spot and moving fast, QPP could mean seven figures in tax savings. If you’re in the danger zone, the recapture risk could exceed the benefit.
This requires specialized expertise in both ecommerce operations and complex tax law. It’s not a DIY project, and your general accountant likely hasn’t seen QPP cases yet. You need professionals who understand manufacturing qualification standards, cost segregation methodology, entity structuring, and ecommerce business models.
The clock is ticking. For existing property acquisitions, the deadline is January 1, 2028. That’s closer than it appears when you account for due diligence, financing, closing, and buildout time.
