When the One Big Beautiful Bill Act (OBBBA) passed last year, it introduced a major tax break for manufacturers and production facilities. Instead of depreciating certain manufacturing-related real property over 39 years, taxpayers can now elect a 100% deduction of the property’s adjusted basis in the year it is placed in service. Essentially, it acts as bonus depreciation for specific buildings and facilities.
To help businesses navigate this temporary special depreciation allowance, the IRS recently issued interim guidance in Notice 2026-16. Taxpayers can rely on this notice until the official proposed regulations are published.
Understanding these rules is critical for maximizing your tax strategy and improving your cash flow. Let's break down the key details of the new guidance so you can determine if your business qualifies for this valuable deduction.
To claim the 100% deduction, your property must meet the definition of Qualified Production Property (QPP). The IRS guidance clarifies that QPP is any portion of nonresidential real property that fits three specific criteria.
First, the property must be subject to the Modified Accelerated Cost Recovery System (MACRS). Second, it must be used as an "integral part" of a qualified production activity. Finally, the property must be placed in service within the United States or its territories.
Timing is also crucial. Construction of the property must begin after January 19, 2025, and before January 1, 2029. Additionally, the property must be placed in service after July 4, 2025, and before January 1, 2031. Generally, the original use of the property must begin with you, the taxpayer, though special rules exist for certain used property.
For a property to be an integral part of a qualified production activity, that activity must happen within its physical space. Usually, each unit of property must meet this requirement on its own.
However, the IRS offers an exception for "integrated facilities." You can treat multiple buildings that operate together on contiguous land as a single unit. For instance, if you build a new storage facility for raw materials that feeds into two neighboring factories on the same site, all three buildings count as one unit for the integral part requirement.
The guidance also includes a helpful de minimis rule. If 95% or more of a building's physical space meets the integral part requirement, you can treat the entire property as satisfying the rule.
The IRS clearly outlines which types of property are ineligible for the new depreciation deduction. You cannot claim the deduction on property used for offices, administrative services, lodging, parking, or sales activities. Facilities dedicated to research, software development, or engineering are also excluded. Furthermore, you cannot use this deduction for buildings used to store finished products.
If your building has mixed uses, you can allocate the unadjusted depreciable basis between the eligible and ineligible portions. The IRS allows any reasonable allocation method, such as using square footage, construction invoices, or architectural plans.
To take advantage of the QPP deduction, the property must be used for a Qualified Production Activity (QPA). The IRS defines a QPA as the manufacturing, production, or refining of a qualified product that results in a "substantial transformation."
Substantial transformation means you are taking raw materials or subcomponents and turning them into a distinct, complete item that is fundamentally different from the original inputs.
The guidance interprets QPA broadly enough to include essential support activities. Receiving and storing raw materials before they are consumed in the production process counts as part of the QPA. Supervisory activities that direct the manufacturing process are also included. However, it is important to note that the term "production" is specifically limited to activities within the agricultural or chemical industries.
The new IRS guidance also outlines election procedures, safe harbors for property placed in service in 2025, and rules for depreciation recapture if the property's use changes within 10 years. Navigating these temporary tax laws can feel overwhelming, but you do not have to figure it out alone.
At SD Mayer, we specialize in helping businesses like yours cut through the complexity and make smart financial decisions. We will work with you to understand your specific operational footprint and ensure you are maximizing every available tax break. Contact our team today to find out how this new depreciation deduction can benefit your bottom line.