IRS Notice 2026-16 provides interim guidance on the new Qualified Production Property (QPP) rules, giving manufacturers a clearer path to claim up to 100% first-year depreciation on qualifying facilities placed in service after July 4, 2025, and before January 2, 2031. This represents a major shift from traditional 39-year depreciation schedules and could substantially improve cash flow for companies investing in domestic production capacity.
What Is Qualified Production Property (QPP)?
Qualified Production Property is a new tax incentive created by the One Big Beautiful Bill Act, allowing companies to elect an immediate special depreciation allowance of up to 100% for certain nonresidential real property used directly in production activities. Qualified production activities generally include manufacturing, production, refining, extraction, and similar industrial operations conducted within the United States. This includes manufacturing facilities and certain integrated buildings used directly in those activities.
Why the New Guidance Matters
Notice 2026-16 provides clarity on how to apply the new Qualified Production Property rules.
The Notice addresses:
What qualifies as QPP
How and when to elect the special depreciation allowance
Timing requirements for construction and placed-in-service dates
Allocation between qualifying and non-qualifying property
Depreciation recapture if use changes
The lessor rules for self-rentals
Manufacturers can rely on this interim guidance until proposed regulations are issued.
What Property Counts Toward the Deduction
One of the more practical questions under the new rules is determining which portions of a facility are eligible for the deduction. Notice 2026-16 provides generally favorable guidance for manufacturers, including:
The deduction applies only to real property; personal property components must be identified and excluded
A 95% safe harbor is available, allowing taxpayers to treat a facility as substantially all qualifying property without a detailed allocation
Certain storage areas for raw materials may be included as part of the qualifying facility
Where an allocation is required, taxpayers have flexibility to apply any reasonable method to distinguish qualifying from non-qualifying property
The “reasonable method” standard gives taxpayers considerable flexibility in how they approach the allocation. The IRS has indicated that a cost segregation study or comparable analysis is an acceptable method.
QPP and Self Rentals
Taxpayers in many industries, including manufacturing, often hold real property used in their trade or business in separate legal entities. These related party “self-rental” structures are used for numerous legal and tax reasons.
The One Big Beautiful Bill Act states property used by a lessee in a qualified production activity does not make the property QPP in the hands of the lessor. This rule excludes lessors from benefiting from the new QPP deduction.
The new guidance allows exceptions to the lessor rules for assets leased to members of a consolidated group and to commonly controlled pass‑through entities. This means the QPP deductions will be available for most landlords in a self-rental with their manufacturing business.
What Manufacturers Should Do Next
Manufacturers with current or planned facility investments should begin evaluating if these projects will qualify for the QPP deduction. QPP planning should also be coordinated with related tax benefits including Section 179 expensing, and bonus depreciation. Manufacturers operating through self-rental structures should pay particular attention to whether their arrangement qualifies under the consolidated group or commonly controlled pass-through exceptions. With deductions of up to 100% available on qualifying production facilities, and interim guidance now in place, manufacturers should consult with their tax advisors to evaluate how QPP applies to their specific situation.
Ready to Maximize Your QPP Deduction?
The opportunity to claim up to 100% first-year depreciation on qualifying production facilities can result in substantial tax savings. Our manufacturing tax specialists can help you evaluate which current and planned facility investments qualify, coordinate QPP planning with other available tax benefits, and structure your approach to maximize cash flow impact.
Schedule a consultation with HBK’s manufacturing tax team to discuss how IRS Notice 2026-16 applies to your specific facility investments and production structure.
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