100% factory write-offs: how QPP under Notice 2026-16 impacts your expansion plans

The Treasury and IRS recently provided long-awaited interim guidance on one of the One Big Beautiful Bill Act’s (OBBBA) most powerful manufacturing and production incentives: a 100% first-year depreciation deduction for qualified production property (QPP). The qualifying portions of new or substantially improved production facilities are considered QPP. For manufacturers planning to build, expand or modernize U.S. plants, this provision can accelerate cost recovery on qualifying building costs far beyond the traditional 39-year depreciation window. Notice 2026-16 provides this interim guidance, a follow-up from IRC 168(n), enacted last July. Sikich’s analysis of IRC Section 168(n) is here.

Background: IRC 168(n)

IRC 168(n) authorizes a special 100% depreciation deduction for QPP in the year the property is placed in service.

Notice 2026-16 expands on several items including:

• Defining “qualifying production activity” (QPA) and other key terms
• Which building costs qualify as QPP
• How the 10-year recapture rules function
• How to make the election
• How landlords may qualify under a related party leasing exception 

What’s a QPA and other key terms in the notice?

• “QPA”: Generally, this refers to the manufacturing, production or refining of a qualified product, resulting in a substantial transformation of the property. 
• “Substantial transformation”: The production of something “fundamentally different” from the original elements or components. This doesn’t include grouping or packaging multiple finished goods into a single package.
  • Provided qualifying examples: Wood pulp to paper conversion, steel rods to screws and bolts, canning freshly caught tuna
  • Provided disqualifying examples: Gift boxes, subscription boxes, bundled electronics
• “Essential activities”: The allowance of certain ancillary qualifying activities.
  • Provided example: The cost of a loading bay and ingredient storage in a tomato sauce factory

What counts as QPP?

Many plants include office, administrative or other non-production functions. Notice 2026-16 addresses these situations:

• Ineligible portions (offices, administrative areas, sales floors, parking, R&D labs, software development, etc.) generally cannot be treated as QPP. 
• Finished goods storage is not treated as QPP.
• A de minimis rule (less than 5%) may allow the entire property to be treated as QPP if the non‑production use is sufficiently minor under the guidance. 

Taxpayers cannot treat property as QPP if they’re required to use the alternative depreciation system (ADS). This most often applies to landlords who elected real property treatment under Section 163(j) to preserve their ability to deduct interest expense.

Recapture: 10-year lookback if use changes

If QPP ceases to serve as an integral part of a QPA within 10 years of being placed in service, the taxpayer must fully recapture all utilized Section 168(n) depreciation in the year of change. Then, they must depreciate the property’s original basis (its cost) over 39 years.

For example, a taxpayer places a $10 million building in service in 2026 and claims a $10 million deduction that year. If they change the building’s manufacturing use in 2036 – before the 10-year period ends – the taxpayer must recognize $10 million of income that year and then depreciate the building over 39 years. This effectively pushes the depreciation life to 49 years.

Who can claim the benefit and how

Any taxpayer that owns eligible property and meets the QPP requirements may claim the deduction, including corporations, partnerships, and other entities. To do so, they must follow specific procedural requirements:

• Make the election on a timely filed federal income tax return (including extensions) for the year the QPP is placed in service. 
• Specify the dollar amount of basis being treated as QPP for each property. Depreciate any remaining, non‑elected basis as non-residential real property. 

Additionally, Notice 2026-16 allows taxpayers to rely on this guidance for property placed in service in taxable years before the Treasury issues proposed regulations, provided they apply the notice consistently to all QPP for those years.

Commonly controlled lessor/lessee exception

In general, a lessor is ineligible for this additional depreciation. In other words, a lessee’s use of leased property doesn’t make the landlord eligible for section 168(n). However, Notice 2026-16 provides two exceptions:

Exception for consolidated groups

One member of a controlled group may claim the benefit when it leases property from another member of a controlled group. For example, a parent/subsidiary lease qualifies.

Exception for commonly controlled pass-through entities

A partnership or S corporation that leases property to a “commonly controlled person” may qualify because the rules don’t treat the landlord as a lessor in this case. However, a C corporation leasing to a related party doesn’t qualify for this exception.

To meet the pass-through exception, the taxpayer must satisfy certain 50% ownership thresholds for most of the year and on the last day of the year, as described in the notice.

This is a welcome rule, given that many taxpayers hold real estate in a separate entity (often a partnership). However, taxpayers should consider how the benefits flow through. Losses pass through to the landlord’s personal return, and the taxpayer may need to make a grouping election under Section 1.469-4(c)(1) to fully utilize this deduction. In some cases – such as when the parents own the real estate entity and children own the operating company – the losses may offer little value to the parents if most of the taxable income is being generated by the operating company.

Planning considerations for manufacturers

For manufacturers considering expansion or modernization, practical steps include:

1. Project timing: Align construction start and placed in-service dates with the statutory windows to lock in eligibility.
2. Facility design: Separate production areas from ineligible functions and minimize non‑production uses where possible to take advantage of the de minimis rule. 
3. Cost tracking: Conduct careful cost segregation and functional space analysis (e.g., square footage allocations) to maximize QPP designation.
4. Long-term use: Model 10-year business plans for each facility to assess recapture risk if production activities shift or facilities are repurposed. 
5. Coordination with other incentives: Evaluate how QPP interacts with regular bonus depreciation, energy credits, and state incentives, recognizing that QPP is a special rule atop existing depreciation rules.

With a team of tax professionals who understand manufacturing, Sikich can determine how to best structure your next plant expansion or acquisition to achieve a greater return on investment. Contact your Sikich tax advisor for assistance in maximizing your tax benefits.

About our authors

Glen Birnbaum, CPA, provides expert accounting and tax advisory services for a range of entities, including those in the agriculture, manufacturing and construction industries. He excels in delivering tax and succession planning services to his clients, who value his commitment to strengthening their businesses. Glen.birmbaum@sikich.com

Lisa Haagensen, CPA, provides tax compliance and consulting services across a wide range of industries and entity types. She is committed to delivering client-focused solutions tailored to each client’s unique needs, with an emphasis on accuracy, efficiency, and proactive planning. Lisa.haagensen@sikich.com