A new, temporary depreciation opportunity could deliver significant tax savings for manufacturers and production‑focused businesses. Introduced under last year’s One Big Beautiful Bill Act (OBBBA), the special depreciation allowance for qualified production property (QPP) applies to certain manufacturing‑related real property placed in service after July 4, 2025, and before Jan. 1, 2031. Previously, these assets were depreciated over 39 years. Now, eligible taxpayers may elect to deduct 100% of the property’s adjusted basis in the year it’s placed in service, essentially allowing bonus depreciation for qualifying buildings and production facilities and accelerating the benefit to your bottom line.

The IRS recently issued interim guidance (Notice 2026-16) that taxpayers generally can rely on until proposed regulations are published. It clarifies several important issues related to the depreciation deduction.

Identifying QPP

The guidance defines QPP as any portion of nonresidential real property that meets the following criteria:

• Subject to the Modified Accelerated Cost Recovery System.
• Used by the taxpayer as “an integral part” of a qualified production activity (QPA, defined below).
• Placed in service in the United States or any of its territories.

In addition, the property’s construction must begin after Jan. 19, 2025, and before Jan. 1, 2029. Its original use generally must begin with the taxpayer, though certain used property may qualify as QPP under special rules.

Property (or a portion of property) is used as an integral part of a QPA if it takes place in the physical space of the property (or a portion of the physical space). Each unit of property (including additions and improvements) must satisfy the integral part requirement on its own, with an exception for “integrated facilities.”

Taxpayers can treat multiple properties that operate as an integrated facility on the same piece or contiguous pieces of land as a single unit of property. For example, if a manufacturer constructs a new building to store raw materials and other manufacturing inputs for activities in two factories on the same site, the three buildings constitute a single unit of property for purposes of the integral part requirement.

The guidance also includes a de minimis rule: If 95% or more of a property’s physical space satisfies the integral part requirement when the property is placed in service, the taxpayer can elect to treat the entire property as satisfying the requirement.

For purposes of determining whether property meets the integral part requirement, property used by a lessee generally isn’t considered to be used by the lessor taxpayer as part of a QPA. The guidance provides exceptions, though, for intercompany leases within consolidated groups and commonly controlled pass-through entities.

The guidance specifies several types of ineligible property, such as: 

• Offices
• Administrative services
• Lodging
• Parking
• Sales activities
• Research activities
• Software development or engineering activities
• Other functions unrelated to a QPA
• Property used to store finished products

Under the guidance, taxpayers may use any reasonable method to allocate a property’s unadjusted depreciable basis between eligible property and ineligible property. Reasonable methods may include: 

• The use of square footage
• Cost segregation data
• Architectural or engineering plans
• Process diagrams
• Construction invoices 

Taxpayers can also use any reasonable method to allocate the basis for “dual-use infrastructure” that serves both eligible property and ineligible property (such as an HVAC or sprinkler system).

Identifying QPAs

A QPA is the manufacturing, production or refining of a qualified product that results in a “substantial transformation” of the qualified product (generally, any tangible personal property except a food or beverage prepared in the same building where it will be sold). The guidance explains that “substantial transformation” refers to the further manufacturing, production or refining of the constituent elements, raw materials, inputs or subcomponents into a final, complete and distinct item of property that’s fundamentally different from those original elements, materials, inputs or subcomponents.

The IRS guidance is somewhat broad, noting that a QPA can include “essential activities” critical to the completion of the product (for example, the receiving and storage of raw materials or other inputs to be used or consumed during a QPA). A QPA also includes certain related activities, such as oversight and direction of the manufacturing, production or refining activities that result in the substantial transformation of a qualified product.

The guidance includes specific definitions for “manufacturing,” “production,” “refining” and other important terms. Notably, “production” is limited to activities in the agricultural or chemical industries.

More to Know 

The interim guidance also includes special rules, election procedures and a safe harbor for property placed in service in 2025 — as well as information about how depreciation must be recaptured and included in ordinary income if a QPP change in use occurs within 10 years after the property is placed in service. 

Here to Help

New rules can be complex, but we’re here to uncomplicate them. Our real estate tax consulting group can help you navigate the rules, determine your eligibility and maximize your savings opportunity.