Key Takeaways
- The One Big Beautiful Bill Act (OBBBA) created Qualified Production Property (QPP), allowing manufacturers to deduct 100% of eligible facility costs in year one—instead of spreading deductions over 39 years.
- Recent IRS guidance (Notice 2026-16) clarifies key requirements and provides welcome flexibility, including exceptions for related-party lease structures.
- Construction must begin after January 19, 2025 and before January 1, 2029, with the facility placed in service before January 1, 2031.
- Only production-related areas qualify—but a 95% de minimis rule allows the entire building to be treated as QPP if nearly all space is used for production.
- A 10-year recapture rule applies—if the property stops being used for production, a portion of the deduction must be added back to income.
- The QPP election is made on a timely filed return and is generally irrevocable, so careful planning is essential.
If you’re planning to build or significantly expand a manufacturing facility in the coming years, there’s a powerful tax incentive you need to understand. The Qualified Production Property (QPP) provision, introduced by the One Big Beautiful Bill Act (OBBBA) and signed into law on July 4, 2025, represents one of the most significant tax benefits for U.S. manufacturers in decades.
Recent IRS guidance in Notice 2026-16, released on February 20, 2026, provides much-needed clarity on how the rules work in practice—and the news is largely favorable for manufacturers planning capital investments.
What is Qualified Production Property (QPP)?
Under traditional tax rules, when you build a manufacturing facility, you depreciate the building over 39 years. That means if you invest $10 million in a new production facility, you’re spreading your tax deductions across nearly four decades.
QPP changes the equation entirely. Eligible manufacturers can now deduct 100% of qualifying facility costs in the year the property is placed in service. That’s an immediate write-off of production-related building costs—walls, roofing, lighting, HVAC systems dedicated to production, and other structural components integral to your manufacturing operations.
When combined with the permanent extension of 100% bonus depreciation for equipment (also included in the OBBBA), this creates an opportunity for manufacturers to potentially write off nearly all costs associated with a new production facility in year one.
What Qualifies as QPP?
QPP is defined as nonresidential real property used as an integral part of a qualified production activity. Notice 2026-16 clarifies that qualified production activities include manufacturing, chemical production, agricultural production, and refining—any activity that results in a “substantial transformation” of materials into a final, complete, and distinct product.
The IRS takes a favorable view of what constitutes substantial transformation. The output must be fundamentally different from the original materials—think converting wood pulp into paper, steel rods into bolts, or components into finished engines. Notably, the guidance confirms that complex assembly operations (like automotive manufacturing) can qualify, since the final product is materially distinct from its parts.
Eligible areas and components may include:
- Production floor space
- Structural components within production areas (walls, roofing, flooring)
- Lighting and electrical systems serving production
- HVAC systems dedicated to production operations
- Fire suppression and safety systems in production areas
- Storage of raw materials used in production (only if located at the facility where production takes place)
Areas that do not qualify include:
- Office space and administrative areas
- Research and development facilities
- Storage of finished goods
- Parking areas
- Sales and retail areas
The 95% De Minimis Rule
One of the most practical clarifications in Notice 2026-16 is the de minimis rule: if 95% or more of a building’s physical space is used in qualified production activities at the time it’s placed in service, the entire building may be treated as QPP.
This rule simplifies compliance for facilities that are overwhelmingly dedicated to production but may have small amounts of incidental non-production space. For manufacturers designing new facilities, this 95% threshold becomes a key planning target.
Critical Timing Requirements
The QPP incentive has strict timing windows that manufacturers must meet:
Construction Start: Must begin after January 19, 2025 and before January 1, 2029
Placed in Service: Property must be placed in service after July 4, 2025 and before January 1, 2031
Original Use: Generally, the original use of the property must begin with the taxpayer.
This gives manufacturers roughly a four-year window to begin construction and approximately six years to complete and place facilities in service. While that may sound like ample time, major manufacturing facilities often take years to plan and build. If you’re considering a significant expansion, now is the time to start planning.
Note: The IRS has provided an automatic one-year extension for properties located in federally declared disaster areas during 2030, extending the placed-in-service deadline to January 1, 2032 for affected properties.
Related-Party Leases: Good News for Common Structures
One of the most significant clarifications in Notice 2026-16 addresses a concern many manufacturers had about ownership structures.
Many businesses hold real estate in a separate LLC for liability protection or financing purposes, then lease it back to the operating company. The original statutory language suggested this common structure might disqualify the property from QPP treatment.
Notice 2026-16 provides two important exceptions that resolve this issue for most manufacturers:
Consolidated Group Exception: If the lessee is in the same consolidated group as the lessor, the lessee’s use of the property in a qualified production activity is attributed to the lessor, allowing QPP treatment.
Common Control Exception: If the lessee and lessor are under common control—generally defined as more than 50% common ownership—the lessee’s qualified production activity use is also attributed to the lessor.
These exceptions mean that operating companies leasing from related holding entities can qualify for QPP treatment, provided all other requirements are met. This is welcome news for manufacturers who use these structures for asset protection or financing flexibility.
However, leases to unrelated third parties still do not qualify. If you lease your facility to an unrelated manufacturer, neither you nor your tenant can claim the QPP deduction on that property.
Allocating Costs for Mixed-Use Facilities
For facilities that include both qualifying and non-qualifying space, Notice 2026-16 provides helpful guidance on allocating costs.
Dual-use infrastructure—such as HVAC systems, electrical systems, or sprinklers that serve both production and non-production areas—may be allocated between QPP and non-QPP using any reasonable method. Acceptable approaches include architectural or engineering plans, process diagrams, cost segregation studies, or construction invoices.
Taxpayers may not use employee headcount or time-based methods for allocation, but multiple methods may be combined if a single approach doesn’t properly reflect the circumstances.
A detailed cost segregation study will be essential for most facilities to properly identify and document which areas and systems qualify for QPP treatment.
The 10-Year Commitment
QPP comes with an important long-term requirement: if the property ceases to be used for qualified production activities at any point during the 10-year period following the placed-in-service date, a recapture rule applies.
Under recapture, the property is treated as if it were disposed of, with gain recognized under Section 1245. The basis is then increased by that gain amount, and the recomputed basis is treated as a new asset—likely depreciated over a new 39-year recovery period.
The good news: changing between different qualified production activities or temporary idleness does not trigger recapture. But converting space to non-production use, selling the property, or leasing it to an unrelated party within the 10-year window will.
This means QPP works best for manufacturers with stable, long-term production plans. Before electing QPP treatment, carefully consider whether there’s any realistic possibility the facility could be converted to non-production use within the decade.
Making the Election
The QPP election must be made on a timely filed original federal income tax return for the year the property is placed in service. The election requires a statement that identifies each property (or portion thereof) being designated as QPP and specifies the amount of basis subject to the 100% deduction.
Importantly, taxpayers can designate a specific dollar amount of basis as QPP—the election doesn’t have to be all-or-nothing. This provides flexibility to balance the immediate tax benefit against other considerations, such as net operating losses or tax credit carryforwards that might reduce the value of the deduction.
The election is irrevocable without IRS consent, and the IRS has indicated it will only grant consent in extraordinary circumstances. Given the stakes, careful modeling and planning before making the election is essential.
Making the Most of the Opportunity
For manufacturers planning significant facility investments, QPP can deliver substantial tax savings. On a $10 million facility investment, the time value of money benefit compared to standard 39-year depreciation could exceed $1.3 million.
To maximize the benefit, manufacturers should consider several proactive steps:
Review capital expenditure plans to identify new construction, expansion, or acquisition projects that fall within the construction and placed-in-service windows.
Design facilities strategically to maximize space dedicated to qualifying production activities. The 95% de minimis rule may be a key design target.
Evaluate entity structures to ensure related-party arrangements qualify under the consolidated group or common control exceptions.
Engage in detailed cost segregation analysis to properly allocate basis between qualifying and non-qualifying property and document eligibility.
Model all scenarios carefully—other factors on your tax return, such as net operating losses or tax credit carryforwards, may influence whether the QPP election makes sense and how much basis to designate.
Taxpayers may rely on the guidance in Notice 2026-16 until proposed regulations are issued, provided they apply the guidance consistently to all applicable QPP. The IRS is accepting comments on the interim guidance through April 20, 2026.
Plan Now, Build Smart
QPP represents a rare opportunity for manufacturers to dramatically accelerate tax deductions on major facility investments. With the clarity provided by Notice 2026-16, manufacturers now have a practical roadmap for evaluating eligibility and structuring projects to maximize the benefit.
But realizing the full value requires careful planning—starting now. If you’re considering building or expanding production capacity in the coming years, reach out to your Rea advisor to discuss how QPP could fit into your overall tax strategy.
About the Author
Chad Bice, CPA, is a Principal at Rea specializing in tax services for manufacturing, construction, and real estate businesses. With more than 25 years of experience, he partners with clients to navigate complex tax strategies and maximize opportunities for growth.
