INSIGHT

Qualified Production Property Bonus Depreciation: Key Insights from IRS Notice 2026-16

Erika Farr • April 9, 2026

Services: Tax

Notice 2026-16: Key Planning and Compliance Insights for U.S. Production Facility Investments

On February 20, 2026, the Internal Revenue Service issued Notice 2026-16, introducing interim guidance for a new, temporary 100% special depreciation allowance on qualified production property (QPP) under § 168(n), a provision added by the One Big Beautiful Bill Act. Treasury and the IRS have indicated their intention to issue proposed regulations, but in the interim, taxpayers may rely on this guidance.

Below, we summarize the notice in a client-focused format, emphasizing critical aspects for effective planning and compliance.

Key Takeaway: What the Notice Enables

Notice 2026-16 allows eligible taxpayers to elect immediate deduction of up to 100% of the unadjusted depreciable basis of QPP in the year the property is placed in service, rather than depreciating such property over several years. This provision can offer significant upfront tax benefits for qualifying investments.

Definitions: Precise definitions for QPP, qualified production activity (QPA), and what constitutes “production.”
Leased Property Rules: Special considerations for real estate entities and related-party structures.
Timing and Election Mechanics: Guidance on how and when to claim the benefit.
Recapture: Rules regarding loss of qualification and potential income inclusion if the property use changes within a specified period.

Background and Effective Dates

The incentive is designed to spur investment in U.S. production facilities by allowing a near-immediate write-off for certain nonresidential real property used in production activities. Statutory timing is strict:

Construction must begin after January 19, 2025, and before January 1, 2029.
Property must be placed in service after July 4, 2025, and before January 1, 2031.

As a practical matter, this means eligibility will focus on placed-in-service years 2025–2030, depending on project schedules.

Definition of Qualified Production Property (QPP)

Under § 168(n)(2)(A), Qualified Production Property (QPP) is defined as the portion of any nonresidential real property to which § 168 applies—that is, property depreciated using the Modified Accelerated Cost Recovery System (MACRS)—that is used by the taxpayer as an integral part of a qualified production activity (QPA).

Typically, QPP includes factory or production buildings; however, for mixed-use facilities, only the qualifying portion of the building is eligible for QPP treatment. Both the statute and Notice 2026-16 stress that only the portion of a facility used in qualifying production activities is counted toward QPP, making precise space allocation essential for compliance.

Leased Property Considerations

The guidance includes important rules for leased property:

Lessor/Lessee Rule: Generally, lessors cannot claim QPP treatment based on the lessee’s qualifying activities. The property must be used by the taxpayer as an integral part of a QPA.
Consolidated Group Exception: Where members of a consolidated group are involved, the group is treated as a single taxpayer for determining qualifying use. This exception can change outcomes for owner/operator structures within consolidated groups.

Special Rule for Property Not Previously Used in QPA

Notice 2026-16 addresses cases where property becomes QPP due to changes in use, ownership, or project structure. The notice clarifies when such property is deemed “acquired” for statutory timing purposes, helping coordinate these requirements with real-world transactions.

What Is Excluded from QPP?

QPP specifically excludes any portion of nonresidential real property used for:

Offices
Administrative services
Lodging
Parking
Sales activities
Research activities
Software development or engineering activities
Other non-production functions as described in the guidance.

Businesses should be prepared to support space allocations (production vs. excluded) with facility drawings, narratives, or other contemporaneous records.

Definition of Qualified Production Activity (QPA)

Qualified production activity involves the manufacturing, production, or refining of a qualified product, where the process leads to a substantial transformation of the property. The “substantial transformation” test is essential; merely packaging or storing items does not meet this threshold unless these actions are part of a broader process that fundamentally changes the nature of the property.

Definition of ‘Production’ and Its Limitations

The statute limits “production” to activities other than agricultural and chemical production. Many activities may colloquially be called “production,” but § 168(n) applies a narrower definition.

Other Operational Rules

QPP Treated as Separate Property: For depreciation system purposes, QPP is treated as separate nonresidential real property.

Guidance Is Specific to § 168(n): The notice’s definitions and rules apply only to this section and are not intended as broad guidance for other tax provisions.

Coordination with Other Code Sections

Topic	How It Connects	Key Authority
MACRS depreciation rules	QPP must be nonresidential real property to which § 168 applies	§ 168(n)(2)(A)
Consolidated return rules	Consolidated group treated as single taxpayer for leased property/usage rules	Notice leased property/consolidated rule
Recapture framework	If QPP stops qualifying, recapture applies under § 1245	§ 168(n)(5)
Separate-property treatment	QPP is treated as separate nonresidential real property for certain purposes	§ 168(g)(7)(A)

Recapture Rules: What Happens If the Building Stops Qualifying?

The incentive includes a 10-year change-in-use window. If QPP ceases to be used as an integral part of a QPA within 10 years of being placed in service, recapture applies under § 1245, resulting in a potential income inclusion. For example, converting production space to offices or storage within this period may trigger a recapture of the benefit.

How to Make the Election

Affirmative Election: Made on the taxpayer’s federal income tax return for the year, in the manner prescribed by the Secretary.
Specificity Required: The election must specify both the nonresidential real property and the qualifying portion designated as QPP.
Procedural Guidance: Notice 2026-16 outlines the time and manner of making the election.

Practical Checklist for the Election

Project timeline documentation (construction start/end and placed-in-service date)

Narrative of the qualifying production process (substantial transformation)

Floor plans or space allocations showing production vs. excluded space

Evidence of “integral part” status in the QPA

If leased: Owner/operator structure and consolidated group analysis as needed

5 Recommended Next Steps for Businesses

Identify candidate facilities placed in service after July 4, 2025, and planned projects through 2030.

Map building space by function (production vs. excluded uses such as office, R&D, parking).

Confirm the “user” for QPA purposes (owner/operator vs. lessor/lessee).

Model recapture risk for facilities that may be repurposed within 10 years.

Plan the tax return election package to help ensure proper documentation and filing.

Tax Planning Considerations

Coordination with Bonus Depreciation and Cost Segregation

Pairing a cost segregation study with a §168(n) Qualified Production Property (QPP) study can significantly enhance your tax savings. Here’s how:

Immediate Expensing: QPP allows full expensing of qualifying nonresidential real property, which does not qualify for bonus depreciation under §168(k).
Complementary Strategies: While QPP and cost segregation may overlap, they serve different purposes and work best together.
Maximized Deductions: Cost segregation identifies assets eligible for accelerated depreciation beyond QPP, increasing your total deductions.
Stronger Documentation: A cost segregation study provides detailed support for QPP deductions, helping reduce audit risk.

By coordinating these strategies, you can unlock greater tax benefits and help to ensure a more efficient depreciation approach.

Additional Considerations When Electing QPP

When evaluating a Qualified Production Property (QPP) election, it’s important to consider the broader tax and financial implications beyond federal benefits:

State Tax Conformity Varies: Not all states conform to federal §168(n) rules. Some have yet to issue guidance, so federal QPP treatment may not apply at the state level.
State-Specific Adjustments: In nonconforming or partially conforming states, QPP deductions may trigger depreciation addbacks, require separate state depreciation schedules, or create ongoing basis differences.
Modeling Cash Tax Impact: It’s essential to assess the combined federal and state tax effects—including impacts on estimated payments, extensions, and apportionment—especially where property basis or net book value affects state tax calculations.
Disposition and Recapture Risk: Be aware of potential §1245 recapture or increased gain upon asset disposition due to accelerated deductions.
Documentation Is Key: Maintain thorough, contemporaneous records to support QPP eligibility, including use and space allocation details.

How We Can Help

Our firm offers comprehensive tax solutions designed to help businesses maximize the benefits of the §168(n) Qualified Production Property (QPP) deduction. We provide strategic guidance tailored to your organization’s needs, including integrated cost segregation analyses to enhance depreciation opportunities and detailed modeling to assess both federal and state tax impacts.

Our team also supports tax preparation and compliance by drafting election statements consistent with IRS Notice 2026-16 and developing internal documentation to support QPP eligibility. Please contact us to learn how we can support your QPP strategy and deliver customized solutions that align with your business objectives.

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