The BasicsÌý
- IRS Notice 2026-16 provides the first interim rules for IRC § 168(n), enabling 100% immediateÌýexpensingÌýfor Qualified Production Property (QPP) placed in service after July 4, 2025.
- To qualify, a facility must be nonresidential real propertyÌýthat’sÌýused as an integral part of a production activity,Ìýsuch as manufacturing orÌýrefining,Ìýthat results in a “substantial transformation” of raw materials.
- Taxpayers canÌýleverageÌýa 95% de minimis rule to deduct an entire building’s cost if production space meets that threshold, though a 10-year recapture rule applies if the property’s use changes.
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Background:ÌýA New Frontier for Capital InvestmentÌý
The One Big Beautiful Bill (OBBB) has introduced a massive incentive for domestic infrastructure. By adding IRC § 168(n), the law provides a temporary 100% special depreciation allowance for Qualified Production Property (QPP). This allows businesses to deduct theÌýfullÌýadjusted basis of new factory buildings and production facilities in the year they are placed in service, rather than over the standard 39-year period.Ìý
What Qualifies as QPP?Ìý
To secure the 100% deduction, property must be nonresidential real MACRS propertyÌýlocatedÌýin the U.S. and meet specific criteria:Ìý
- Construction Timeline:ÌýConstruction must begin after Jan.Ìý19, 2025, and before Jan.Ìý1, 2029.Ìý
- Service Date:ÌýThe facility must be placed in service after July 4, 2025, and before Jan.Ìý1, 2031.Ìý
- The “Integral Part” Test:ÌýThe property must be used as an integral part of a Qualified Production Activity (QPA), such as manufacturing, production, or refining,Ìýthat results in a “substantial transformation” of raw materials into a distinct final product.Ìý
Ineligible Space and Allocation MethodsÌý
The deduction does not apply to space used for offices,Ìýresearch, parking, sales,Ìýor finished product storage. However,Ìýthe IRS allows taxpayers to use any reasonable method toÌýallocateÌýthe building’s basis between eligible production areas and ineligible spaces.ÌýPer Notice 2026-16,Ìýaccepted methods include cost segregation studies. Note that the IRS has explicitlyÌýstatedÌýthat employee headcount isÌýnotÌýconsidered a reasonable method for this allocation.Ìý
Additionally, if a building meets a 95% de minimis ruleÌý—Ìýwhere 95% or more of the physical space is used for productionÌý—Ìýthe taxpayer mayÌýelectÌýto treat the entire property as QPP.Ìý
AcquiredÌýBuildings, Improvements, and AdditionsÌý
While the deduction is primarily aimed at new construction, existing buildings andÌýsubsequentÌýupgrades can also qualify for 100%ÌýexpensingÌýunder specific conditions. An existing building qualifies as QPP if it is purchased from an unrelated party and satisfies strict “original use” requirementsÌý—Ìýi.e., the property must not have been used by the taxpayer prior to acquisition, nor can it have been used in a qualified production activity byÌýanyÌýperson between January 1, 2021, and May 12, 2025.Ìý
For many taxpayers, the most significant opportunity lies in improvements or additions. Notice 2026-16 clarifies that these are treated as separate units of property. This is a taxpayer-favorable rule:ÌýEven if an original building does not qualify (for instance, if it was constructed before 2025), a new qualifying improvementÌý—Ìýsuch as a factory expansion or a structural upgrade for a new production lineÌý—Ìýcan separately qualify for 100% expensing. Each addition must independently satisfy the “integral part,” “beginning of construction,” and “placed-in-service” requirements to beÌýdesignatedÌýas QPP.Ìý
Leasing and Integrated FacilitiesÌý
Generally, aÌýlandlord cannot claim the deduction if they lease a building to a tenant who performs the production. However,ÌýNoticeÌý2026-16Ìýprovided exceptions forÌýconsolidatedÌýgroups and commonly controlled pass-through entities, allowing the property-holding entity and the operating entity to be treated as one in certain cases.Ìý
Furthermore, the Integrated Facilities Rule allows multiple propertiesÌýlocatedÌýon the same or contiguous land to be treated as a single unit for the purpose of satisfying the production requirements.Ìý
Making the ElectionÌý
Claiming the 100% deduction is not automatic; it requires a formal election. Taxpayers must attach a detailed statement to theirÌýtimelyÌýfiled federal tax return for the year the property is placed in service. This statement must include the property’s address, a description of the eligible production areas, and the specific dollar amount of the basis beingÌýdesignatedÌýas QPP. Once made, this election isÌýgenerally irrevocableÌýwithout formal consent from the IRS.Ìý
The 10-Year Recapture RuleÌý
The significant upfront benefit of Section 168(n) comes with a long-term compliance requirement. A 10-year recapture period begins on the date the property is placed in service. If the building ceases to be used for a qualified production activity within that decadeÌý—Ìýfor example, if a manufacturing floor is converted into a distribution warehouse or general office spaceÌý—Ìýthe taxpayer must “recapture” the benefit. The excess depreciation originally claimed over what would have been allowed under standard rules is reported as ordinary income in the year the use changes.Ìý
Your TakeawayÌý
The QPP provisions provide a massive cash-flow opportunity for U.S. manufacturers, but capturing this benefit requires more than just standard tax filing. A specialized QPP cost segregation study is essential toÌýidentifyÌýand document the specific costs associated with production areas versus ineligible space. Having an engineering-based study provides the necessary substantiation to support your deduction.Ìý
To ensure your next facility build, renovation, or purchase maximizes these tax incentives, consult with a specialist today.Ìý
Frequently Asked QuestionsÌý
Q:ÌýDoes the 100% deduction apply to the cost of the land?ÌýÌý
A: No. Like all depreciation provisions, IRC § 168(n) applies only to the adjusted basis of the “depreciable” property—the building and structural components. Land is not depreciable and must be excluded from the QPP basis.Ìý
Q: Can I use this for a building IÌýpurchasedÌýrather thanÌýbuiltÌýmyself?ÌýÌý
A: Yes, provided the property was not used in a QPA by any person betweenÌýJan.Ìý1, 2021, and May 12, 2025, and the taxpayer has not used the property prior to acquisition. The property also cannot beÌýacquiredÌýfrom a related party.Ìý
Q: If I renovate an old warehouse into a production facility, do the costs qualify?Ìý
A: Yes, provided the renovation costs are capitalized as improvements or additions. Under Notice 2026-16,ÌýsubsequentÌýimprovements are treated as separate units of property.ÌýAs long asÌýthe renovation (the “addition”) begins after Jan.Ìý19, 2025, and is placed in service by the 2031 deadline, those specific costs can qualify for 100%Ìýexpensing, even if the underlying warehouse structure does not.