The IRS has released Notice 2026‑16, providing long‑awaited interim guidance on Qualified Production Property (QPP) under IRC §168(n). Enacted as part of the One Big Beautiful Bill Act, QPP introduces a powerful new incentive for U.S. manufacturers by allowing up to 100% bonus depreciation on certain production facilities in the year they are placed in service. This guidance gives taxpayers clarity on what qualifies, how the deduction is determined, and how QPP interacts with other depreciation strategies such as cost segregation.

What Is Qualified Production Property (QPP)?

Qualified Production Property generally refers to nonresidential real property that is used by a taxpayer as an integral part of a qualified production activity. To qualify, the property must:

• Be nonresidential real property (e.g., factories, processing plants, production facilities) that is MACRS property and not subject to ADS
• Be used directly in a qualifying production activity as an integral part thereof
• Have construction begin after January 19, 2025, and before January 1, 2029
• Be placed in service after July 4, 2025, and before January 1, 2031 (with potential one-year extensions for disasters)
• Meet the original use requirement (generally, the taxpayer must be the first to use the property, though used property may qualify under specific rules if it has not previously been depreciated as QPP)
• Be affirmatively elected as QPP by the taxpayer (irrevocable without IRS consent)

Unlike traditional bonus depreciation, QPP applies to entire buildings, not just personal property and land improvements. While the statute and IRS guidance focus on the building’s role in a qualified production activity, QPP treatment applies only when the taxpayer who owns the building also directly uses it in that activity, not where the property is merely leased to a manufacturer.

What Activities Qualify?

A building qualifies as QPP only if it is integral to a qualified production activity, which the IRS defines as activities that result in the substantial transformation of property into a new product. Qualified production activities include manufacturing, chemical production, agricultural production, and refining. Activities such as storage, distribution, or administrative support, when standing alone, do not qualify. However, buildings that house both qualifying and non‑qualifying uses may still partially qualify under allocation rules described in the notice.

The De Minimis Rule: Avoiding Disqualification for Minor Non‑Production Uses

A practical de minimis rule provides significant flexibility: if 95 percent or more of the physical space satisfies the integral part requirement at placement in service, the taxpayer may elect to treat the entire property as QPP. Thus, under this framework, minor office, administrative, or support areas embedded within a production facility generally do not disqualify the building. The analysis focuses on whether non‑qualifying use is incidental relative to the building’s overall production function. This rule is especially important for modern manufacturing facilities, which often include quality control labs, engineering offices, or limited administrative space within the same structure.

How QPP Benefits Manufacturers

QPP represents one of the most significant manufacturing incentives enacted in decades. For eligible taxpayers, the benefits include immediate expensing of up to 100% of a qualifying building’s depreciable basis, major cash‑flow acceleration compared to 39‑year straight‑line depreciation, and increased certainty due to IRS‑issued interim guidance that taxpayers may rely on now.

For manufacturers expanding or reshoring U.S. production, QPP dramatically reduces the after‑tax cost of new facilities.

The Interplay Between QPP and Cost Segregation

QPP does not replace cost segregation. Instead, the two strategies work together. Cost segregation identifies and reclassifies short‑life components such as 5‑, 7‑, and 15‑year property and applies regardless of whether the building qualifies as QPP. QPP applies to the remaining building structure that would otherwise be depreciated over 39 years.

When combined, a taxpayer may use cost segregation to accelerate depreciation on qualifying components and apply QPP bonus depreciation to the remaining structural basis. The result is often near‑total first‑year depreciation of a manufacturing facility, subject to proper analysis and elections.

Key Planning Considerations

While Notice 2026‑16 provides critical clarity, QPP remains a high‑impact, high‑scrutiny incentive. Taxpayers should carefully evaluate whether the activity meets the substantial transformation standard, how mixed‑use space is allocated, election timing and documentation requirements, and potential depreciation recapture if the property later ceases to qualify. The IRS has stated that taxpayers may rely on this interim guidance until proposed regulations are issued.

How ICS Tax Helps

ICS Tax works with manufacturers, developers, and owner‑operators to evaluate whether facilities qualify as QPP, integrate QPP with cost segregation and accounting method strategies, prepare defensible studies aligned with IRS guidance. » Contact us to maximize your first‑year deductions while managing audit risk.