Here’s what HIVE AI had to say about “How to apply new depreciation rules to manufacturing facilities?”:

Applying New Depreciation Rules to Manufacturing Facilities

Identify which “new rules” apply to you

Section 179 expensing limits increased starting with tax years beginning after 12/31/2024: up to $2,500,000 immediate expensing, with phase-out starting at $4,000,000 of Section 179 property placed in service, and indexed for inflation thereafter. Manufacturing equipment and many interior improvements can qualify. 1
Special depreciation allowance for Qualified Production Property (QPP): new law defines QPP as tangible personal property used in manufacturing/production/refining of a “qualified product,” with key coordination rules: QPP is a separate class for purposes of other special depreciation elections and is excluded if ADS applies; deduction allowed for AMT without section 56 adjustments. Practically, this creates its own class for bonus/special depreciation elections and allows full benefit for AMT. 2
What counts as manufacturing/production for QPP: activities must result in a substantial transformation; “production” is limited to agricultural and chemical production per the statute’s definitions, and food/beverage made in the same building as retail sale is excluded from “qualified product.” These definitions help determine if your facility/equipment qualifies. 2
Advanced manufacturing investment credit (section 48D) increased to 35% for semiconductor facilities/equipment placed in service after 12/31/2025. If you’re building a semiconductor fab or equipment manufacturing facility, coordinate the credit with depreciation (basis reduction rules apply under section 50 generally). 3
Definition of “advanced manufacturing facility” for 48D remains focused on semiconductor manufacturing or semiconductor equipment manufacturing; also note coordination with rehab credit and progress expenditure rules for credit timing. 4

Determine what assets qualify and how to classify them

Manufacturing facility and ancillary assets

“Manufacturing facility” generally means any facility used in the manufacturing/production of tangible personal property; directly related and ancillary facilities can be included for certain bond rules, which is often a helpful benchmark when mapping plant assets. 5
For capitalization and self-constructed property, include depreciation capitalized to inventory during production under UNICAP where applicable; assets used “in a reasonably proximate manner” in production may have depreciation capitalized to designated property during the measurement period. This affects book-tax timing and the placed-in-service readiness of the facility. 6

Qualified Production Property (QPP) considerations

QPP is its own class for special depreciation elections and does not include property subject to ADS. Ensure assets are not required to use ADS (e.g., certain predominantly foreign-use property, tax-exempt bond-financed property, listed property with inadequate substantiation, etc.) if you intend to claim the special allowance. 2

Coordinate special depreciation and elections

Bonus/special depreciation computation and timing

Additional first-year depreciation is computed on unadjusted depreciable basis; remaining basis is depreciated using MACRS after reducing for the bonus amount. For self-constructed property subject to sunset limits, the bonus may be limited to basis attributable to pre-cutoff manufacture/construct costs. These mechanics remain relevant when applying any special allowance to QPP. 7
Consolidated groups applying bonus under section 168(k): ensure consistent application and use of component rules; certain late/revoked elections and method changes have ordering rules. 8

Elections and method changes

If you need to change depreciation methods to comply with bonus rules or fix impermissible methods, use the automatic accounting method change procedures referenced in Rev. Proc. 2020-50 and Form 3115 instructions for changes under sections 168 and 1.168(k)-2/1.1502-68; certain changes qualify for reduced filing and have ordering/cut-off rules. 9
Rev. Proc. 2025-23 confirms interaction with the 2020-50 framework and when change-in-use rules under 1.168(i)-4 apply instead of method-change procedures; ensure you’re using the correct path when a facility changes predominant use (e.g., to foreign use triggering ADS). 10
Example of change in use: asset moved outside the U.S. in year 2 switched to ADS prospectively; prior-year bonus was not redetermined. This informs planning for cross-border redeployments of manufacturing equipment. 11

Integrate credits and other incentives for manufacturing facilities

Section 48D credit for semiconductor facilities

For semiconductor fabs/equipment, the 48D credit is 35% for property placed in service after 12/31/2025; progress expenditure rules can accelerate credit timing for long-lead projects. Avoid double benefits with rehab credits. Coordinate basis reduction for the credit with your depreciation schedules. 4 3

Environmental control facilities in plants

If you install pollution control equipment, special amortization rules under section 169 may apply when requirements for “new identifiable treatment facility” are met (note exclusions for buildings and conditions on capacity/operating cost effects). This impacts depreciation versus amortization planning. 12 13

Practical steps to apply the new rules

1) Map assets and uses

Identify all plant components, machinery, and supporting assets. Determine which are QPP based on manufacturing/production/refining that substantially transforms tangible property, and confirm none are forced into ADS. 2

2) Sequence expensing vs special depreciation

Apply Section 179 expensing first to targeted assets (subject to income/phaseout limits), then apply any special/bonus depreciation for QPP or general 168(k) where applicable, and finally regular MACRS on remaining basis. 1 7

3) Consider method changes and elections

If prior-year assets need to be aligned with new bonus/special allowance rules or corrected, file Form 3115 under the automatic procedures noted in Rev. Proc. 2020-50 and its cross-references in the instructions; observe ordering rules if also making late/revoked elections. 9 8

4) Coordinate with credits

For semiconductor projects, model 48D credit timing and basis reduction versus accelerated depreciation; ensure compliance with progress expenditure and coordination rules. 4 3

5) Watch for change-in-use and ADS triggers

If equipment is repurposed or moved abroad, switch to ADS prospectively; prior bonus isn’t clawed back, but future depreciation slows. Plan asset location decisions accordingly. 11

6) Estimate effects on quarterly payments

Annualization safe harbors allow proportionate inclusion of depreciation and special deductions (including section 179 and 168(k)) for estimated taxes to avoid underpayment penalties. 14

Common edge cases and tips

Mixed-use facilities and unit-of-property

If components are assigned different useful lives for financial or regulatory reporting, or are placed in different MACRS classes, you may need to treat them as separate units of property for depreciation to avoid overly broad unit-of-property groupings. 15

Self-constructed property and placed-in-service

For large projects, carefully document when the facility or component is placed in a state of readiness and availability for its assigned function for depreciation start, and apply the component rules if you elected component treatment under the bonus regulations. 8

Action checklist for a manufacturing facility project

Classify each asset as QPP, other 168(k)-eligible, Section 179 property, ADS property, or non-depreciable
Decide Section 179 targeting and ensure taxable income/phaseout modeling supports it for the year placed in service 1
Apply special depreciation for QPP and coordinate with any election-out rules for other classes as needed 2
For semiconductor facilities, model 48D credit vs depreciation and ensure documentation for “primary purpose” and progress expenditures 4 3
Verify no ADS trigger (e.g., tax-exempt financing constraints, foreign use) for assets you expect to treat as QPP 2
If correcting past treatment, prepare Form 3115 under automatic change procedures, observing ordering rules with late/revoked bonus elections 9 8
Update estimated tax computations using depreciation safe harbors to avoid penalties 14

If you share details on your facility type, project timeline, and whether you’re in semiconductors or another manufacturing sector, I can tailor the depreciation and credit stacking plan with specific class lives, conventions, and election recommendations.

Sources

1 – One Big Beautiful Bill Act Sec. 70306. Increased dollar limitations for expensing of certain depreciable business assets 📄 Summarize
2 – One Big Beautiful Bill Act Sec. 70307. Special depreciation allowance for qualified production property 📄 Summarize
3 – One Big Beautiful Bill Act Sec. 70308. Enhancement of advanced manufacturing investment credit 📄 Summarize
4 – IRC § 48D(b) 📄 Summarize
5 – IRC § 144(a) 📄 Summarize
6 – Treasury Regulation 1.263A-11 📄 Summarize
7 – REG–104397–18 📄 Summarize
8 – Rev. Proc. 2020-50 📄 Summarize
9 – IRS – Instruction 3115 Instructions for Form 3115, Application for Change in Accounting Method 📄 Summarize
10 – Rev. Proc. 2025-23 📄 Summarize
11 – TD 9874 📄 Summarize
12 – IRC § 169(d) 📄 Summarize
13 – PLR-146782-11 📄 Summarize
14 – Treasury Regulation 1.6655-2 📄 Summarize
15 – REG-168745-03 📄 Summarize

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How to apply new depreciation rules to manufacturing facilities?