The IRS has released interim guidance (Notice 2026‑16) on a new but temporary special depreciation allowance for Qualified Production Property (QPP) created under last year’s One Big Beautiful Bill Act (OBBBA). This new provision offers a significant opportunity for manufacturers and other production‑focused businesses investing in new facilities.
Under the previous tax rules, taxpayers were required to depreciate certain real property over a 39‑year period. The OBBBA changes that, allowing taxpayers to elect a 100% deduction of the property’s adjusted basis in the year it’s placed in service. Effectively, this operates like bonus depreciation for eligible buildings and production facilities placed in service after July 4, 2025 and before January 1, 2031.
The newly released IRS guidance provides clarity on how QPP is defined and how taxpayers can determine whether a building or portion of a building is eligible for this accelerated deduction.
Jump to: Identifying Qualified Production Activities (QPAs) | Other Key Provisions in the Interim Guidance
Defining Qualified Production Property (QPP)
Notice 2026‑16 defines QPP as any portion of nonresidential real property that meets all of the following:
- Is subject to the Modified Accelerated Cost Recovery System (MACRS)
- Is used by the taxpayer as an integral part of a Qualified Production Activity (QPA)
- Is placed in service in the United States or its territories
Additionally:
- Construction must begin after January 19, 2025 and before January 1, 2029
- Original use of the property must generally begin with the taxpayer, though certain used property may qualify under special rules
What does “integral part” mean?
Property (or part of the property) meets the integral‑part requirement if the QPA physically occurs within that space. Each unit of property—including any improvements—must satisfy this requirement independently unless it qualifies as part of an integrated facility.
Integrated facility example:
If a manufacturer constructs a building to store raw materials used in two factories on the same site, the storage building and both factories may be treated as a single unit of property for purposes of the integral‑part requirement.
95% de minimis rule
If 95% or more of a property’s physical space meets the integral‑part requirement at the time the property is placed in service, the taxpayer may elect to treat the entire property as satisfying the requirement.
Treatment of leased property
Generally, property used by a lessee does not count as being used by the lessor as part of a QPA. However, the guidance includes exceptions for:
- Intercompany leases within consolidated groups
- Commonly controlled pass‑through entities
Property that is not eligible
The guidance excludes property used for:
- Office or administrative functions
- Lodging
- Parking
- Sales activities
- Research activities
- Software development or engineering
- Storage of finished goods
- Other functions unrelated to a QPA
Basis allocation for mixed‑use buildings
Taxpayers may use any reasonable method to allocate unadjusted depreciable basis between eligible and ineligible property.
Reasonable methods may include:
- Square footage
- Cost segregation data
- Architectural or engineering plans
- Process diagrams
- Construction invoices
The same flexibility applies to “dual‑use infrastructure,” such as HVAC or sprinkler systems serving both eligible and ineligible areas.
Identifying Qualified Production Activities (QPAs)
A Qualified Production Activity includes the manufacturing, production, or refining of a qualified product, resulting in a substantial transformation of raw materials, inputs, or subcomponents into a new and distinct item of tangible personal property.
A “qualified product,” for this purpose, includes tangible personal property, except for food or beverages prepared in the same building where they will be sold.
Meaning of “substantial transformation”
This involves converting constituent elements, raw materials, or subcomponents into a final item fundamentally different from its original components.
Broader interpretation of qpa
A QPA may also include:
- Essential activities critical to completing the product, such as receiving and storing raw materials
- Oversight and direction of the manufacturing, production, or refining activities
The guidance provides detailed definitions for key terms. Notably, the term “production” is limited to activities within the agricultural and chemical industries.
Other Key Provisions in the Interim Guidance
The IRS also addresses:
- Special rules for property placed in service in 2025
- Election procedures for claiming the QPP deduction
- A safe harbor for certain taxpayers
- Depreciation recapture requirements
If QPP undergoes a change in use within 10 years after being placed in service, depreciation must be recaptured as ordinary income.
How Boulay Can Help
The new QPP depreciation deduction presents a valuable opportunity for taxpayers planning, constructing, or expanding manufacturing or refining facilities. However, determining eligibility—and optimizing the deduction—requires careful analysis of the property, activities, and integration of facility components.
Our team can help you:
- Assess whether your project meets QPP and QPA requirements
- Model tax benefits and cash‑flow impacts
- Coordinate cost allocation and cost‑segregation strategies
- Support documentation and compliance
- Plan ahead to avoid unexpected recapture exposure
If you are planning a new facility or considering improvements that may qualify, our team can help you navigate the rules and maximize this new tax opportunity.