The Basics
- IRS Notice 2026-16 provides the first interim rules for IRC § 168(n), enabling 100% immediate expensing for Qualified Production Property (QPP) placed in service after July 4, 2025.
- To qualify, a facility must be nonresidential real property that’s used as an integral part of a production activity, such as manufacturing or refining, that results in a “substantial transformation” of raw materials.
- Taxpayers can leverage a 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: A New Frontier for Capital Investment
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 the full adjusted basis of new factory buildings and production facilities in the year they are placed in service, rather than over the standard 39-year period.
What Qualifies as QPP?
To secure the 100% deduction, property must be nonresidential real MACRS property located in the U.S. and meet specific criteria:
- Construction Timeline: Construction must begin after Jan. 19, 2025, and before Jan. 1, 2029.
- Service Date: The facility must be placed in service after July 4, 2025, and before Jan. 1, 2031.
- The “Integral Part” Test: The property must be used as an integral part of a Qualified Production Activity (QPA), such as manufacturing, production, or refining, that results in a “substantial transformation” of raw materials into a distinct final product.
Ineligible Space and Allocation Methods
The deduction does not apply to space used for offices, research, parking, sales, or finished product storage. However, the IRS allows taxpayers to use any reasonable method to allocate the building’s basis between eligible production areas and ineligible spaces. Per Notice 2026-16, accepted methods include cost segregation studies. Note that the IRS has explicitly stated that employee headcount is not considered a reasonable method for this allocation.
Additionally, if a building meets a 95% de minimis rule — where 95% or more of the physical space is used for production — the taxpayer may elect to treat the entire property as QPP.
Acquired Buildings, Improvements, and Additions
While the deduction is primarily aimed at new construction, existing buildings and subsequent upgrades can also qualify for 100% expensing under specific conditions. An existing building qualifies as QPP if it is purchased from an unrelated party and satisfies strict “original use” requirements — i.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 by any person between January 1, 2021, and May 12, 2025.
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: Even if an original building does not qualify (for instance, if it was constructed before 2025), a new qualifying improvement — such as a factory expansion or a structural upgrade for a new production line — can separately qualify for 100% expensing. Each addition must independently satisfy the “integral part,” “beginning of construction,” and “placed-in-service” requirements to be designated as QPP.
Leasing and Integrated Facilities
Generally, a landlord cannot claim the deduction if they lease a building to a tenant who performs the production. However, Notice 2026-16 provided exceptions for consolidated groups and commonly controlled pass-through entities, allowing the property-holding entity and the operating entity to be treated as one in certain cases.
Furthermore, the Integrated Facilities Rule allows multiple properties located on the same or contiguous land to be treated as a single unit for the purpose of satisfying the production requirements.
Making the Election
Claiming the 100% deduction is not automatic; it requires a formal election. Taxpayers must attach a detailed statement to their timely filed 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 being designated as QPP. Once made, this election is generally irrevocable without formal consent from the IRS.
The 10-Year Recapture Rule
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 decade — for example, if a manufacturing floor is converted into a distribution warehouse or general office space — the 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.
Your Takeaway
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 to identify and document the specific costs associated with production areas versus ineligible space. Having an engineering-based study provides the necessary substantiation to support your deduction.
To ensure your next facility build, renovation, or purchase maximizes these tax incentives, consult with a specialist today.
Frequently Asked Questions
Q: Does the 100% deduction apply to the cost of the land?
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.
Q: Can I use this for a building I purchased rather than built myself?
A: Yes, provided the property was not used in a QPA by any person between Jan. 1, 2021, and May 12, 2025, and the taxpayer has not used the property prior to acquisition. The property also cannot be acquired from a related party.
Q: If I renovate an old warehouse into a production facility, do the costs qualify?
A: Yes, provided the renovation costs are capitalized as improvements or additions. Under Notice 2026-16, subsequent improvements are treated as separate units of property. As long as the renovation (the “addition”) begins after Jan. 19, 2025, and is placed in service by the 2031 deadline, those specific costs can qualify for 100% expensing, even if the underlying warehouse structure does not.
