The Internal Revenue Service and Treasury Department have released interim guidance clarifying a new tax break that allows manufacturers to deduct the entire cost of qualifying factory construction and upgrades in the first year, rather than spreading the deduction over 39 years.
Notice 2026-16 addresses the special depreciation allowance for qualified production property (QPP) created under Section 168(n) of the Internal Revenue Code. The provision, added by Section 70307 of the One, Big, Beautiful Bill Act, applies to nonresidential real property used as an integral part of manufacturing, production or refining activity.
The American Pet Products Association highlighted the guidance in its newsletter, noting the allowance applies to new domestic manufacturing facilities as well as improvements to existing facilities where construction began after Jan. 19, 2025, and before Jan. 1, 2029, and where the property is placed in service before Jan. 1, 2031.
How the deduction works
Under the guidance, a taxpayer that elects to designate property as qualified production property (QPP) may deduct 100% of its adjusted basis in the year the property is placed in service rather than recovering the cost through standard depreciation. The adjusted basis is then reduced accordingly for future depreciation calculations.
To qualify, property must be nonresidential real property to which standard depreciation rules apply, used as an integral part of a qualified production activity, placed in service in the U.S. or a U.S. territory, and originally used by the taxpayer claiming the deduction. Property must also not be subject to the alternative depreciation system.
The guidance defines a qualified production activity as manufacturing, production or refining that results in a "substantial transformation" of the property comprising a finished product. Certain related activities, including quality testing, oversight and the receiving and storage of raw materials used in production, can also count toward eligible space, provided they occur within the same facility as the qualifying production activity.
What doesn't qualify
The notice excludes office space, administrative areas, lodging, parking, sales space, research and development areas, and software engineering space from eligibility. Space used to store finished products, rather than raw materials or production inputs, is also excluded.
Manufacturers with current or planned facility projects should assess whether they qualify for the QPP deduction and coordinate that planning with other tax benefits like Section 179 expensing and bonus depreciation.
As always, manufacturers should consult their tax advisors to determine how QPP applies to their situation.
