100% Depreciation Deduction for Production Facilities

Recent legislation introduced a powerful new tax incentive for manufacturers and producers investing in facilities and infrastructure. The One Big Beautiful Bill Act (OBBBA) created a temporary 100% depreciation deduction for certain production-related real property, allowing taxpayers to immediately expense costs that previously were recovered over decades. The provision applies to qualified production property (QPP) placed in service after July 4, 2025, and before January 1, 2031. This provision represents one of the most significant acceleration opportunities for capital‑intensive manufacturers in decades.

The IRS recently issued interim guidance in Notice 2026-16, which taxpayers generally may rely on until superseded by proposed regulatoins. This guidance clarifies several key aspects of the new deduction.

Under the guidance, QPP is defined as any portion of nonresidential real property that meets all of the following criteria:

In addition, construction of the property must begin after January 19, 2025, and before January 1, 2029. Generally, the original use of the property must begin with the taxpayer, although limited categories of used property may qualify if prior use restrictions are met and acquisition requirements similar to those under Section 179 are satisfied.

Property (or a portion of property) is considered an integral part of a QPA if the production activity occurs within the physical space of that property. Each unit of property—including additions and improvements—must independently satisfy this requirement, subject to a special rule for integrated facilities.

Taxpayers may treat multiple properties that operate together as an integrated facility and are located on the same or contiguous parcels of land as a single unit of property. For example, if a manufacturer constructs a building to store raw materials used in two factories on the same site, all three buildings may be treated as one unit of property for purposes of the integral part analysis.

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

As a general rule, property used by a lessee is not treated as used by the lessor taxpayer in a QPA. However, the guidance provides exceptions for intercompany leases within consolidated groups and among commonly controlled pass-through entities.

The guidance identifies several categories of ineligible property, including property used for offices or administrative services, lodging or parking, sales or marketing activities, research, software development or engineering functions, and other activities unrelated to

Taxpayers may use any reasonable method to allocate a property’s unadjusted depreciable basis between eligible and ineligible components. Acceptable methods may include square footage analyses, cost segregation studies, architectural or engineering plans, process flow diagrams, or construction invoices. Reasonable allocation methods may also be applied to dual-use infrastructure such as HVAC, electrical or sprinkler systems that serve both qualifying and nonqualifying areas.

A QPA consists of the manufacturing, production or refining of a qualified product that results in a substantial transformation. In general, a qualified product includes tangible personal property, other than food or beverages prepared in the same building in which they are sold.

The guidance explains that a substantial transformation occurs when raw materials, inputs or subcomponents are manufactured, produced or refined into a final product that is complete, distinct and fundamentally different from its original components.

For example, transforming steel coils into finished automotive components would constitute a substantial transformation.

The IRS interprets QPAs broadly. In addition to core production activities, a QPA may include essential functions critical to completing the product, such as receiving and storing raw materials or production inputs. Certain related activities, such as oversight and direction of manufacturing, production or refining processes, may also qualify.

The guidance provides detailed definitions of manufacturing, production, refining and related terms. Notably, production is limited to activities within the agricultural and chemical industries.

Notice 2026-16 also outlines special elections, procedural rules and a safe harbor applicable to property placed in service during 2025. Taxpayers should be aware that depreciation claimed under this provision is subject to recapture and must be included in ordinary income if a change in use of QPP occurs within 10 years of the property being placed in service.

Properly identifying, designating and substantiating QPP is critical to maximizing the value of this new depreciation incentive. CSH’s tax and advisory professionals work closely with manufacturers and producers to assess eligibility, implement cost segregation strategies and ensure compliance with evolving IRS guidance.

To learn how your organization can take full advantage of this opportunity, connect with our team.