The One Big Beautiful Bill Act created one of the most significant new depreciation opportunities for U.S.-based manufacturers, producers, refiners, and agricultural businesses in years. Under new IRC Section 168(n), certain Qualified Production Property, or QPP, may qualify for a 100% first-year depreciation deduction.
For companies investing in production facilities, this provision can dramatically accelerate tax deductions that would otherwise be recovered over a much longer depreciation period. But the opportunity is not as simple as labeling a building a “manufacturing facility.” IRS Notice 2026-16 makes clear that eligibility depends on the facts, facility use, production activity, timing, basis allocation, and documentation.
For taxpayers and advisors, the key question is not just, “Do we have a production facility?” The better question is, “Which portions of this facility qualify, how much basis is allocable to those areas, and how do we support the position?”
That is where cost segregation and engineering-based analysis come in.
What is Qualified Production Property?
Qualified Production Property generally means the qualifying portion of nonresidential real property that is used by the taxpayer as an integral part of a qualified production activity. The property must meet several requirements, including being MACRS property, located in the United States or a U.S. territory, originally used by the taxpayer, properly elected as QPP, not subject to ADS, and not otherwise ineligible.
Two timing rules are especially important:
- Construction must begin after January 19, 2025 and before January 1, 2029.
- The property must be placed in service after July 4, 2025 and before January 1, 2031.
The benefit is elective. The taxpayer must designate the property as QPP through the required election process, and the IRS guidance indicates that the election and designation are important compliance items.
What activities qualify?
Qualified production activity generally involves manufacturing, production, or refining of a qualified product. For this purpose, a qualified product generally means tangible personal property, except for certain food or beverages prepared in the same building as the retail establishment where sold.
The IRS guidance places significant emphasis on substantial transformation. In general, the activity must transform raw materials, inputs, or subcomponents into a final, complete, and distinct item of property that is fundamentally different from the original inputs. IRS examples include converting wood pulp to paper, steel rods to screws and bolts, and freshly caught tuna into canned tuna.
Activities that merely package or group finished goods together generally do not meet the substantial transformation requirement.
Not every part of the facility qualifies
One of the most important planning points is that QPP applies only to the qualifying portion of the property. A facility can have both eligible and ineligible areas.
IRS Notice 2026-16 identifies several categories of ineligible property, including areas used for offices, administrative services, lodging, parking, sales activities, research activities, software development, engineering activities, and other functions unrelated to qualified production activity. Finished-goods storage is also identified as ineligible.
This creates a practical challenge for mixed-use buildings. A facility may include production space, raw material receiving, preparation areas, offices, finished-goods storage, quality control areas, research areas, employee facilities, and administrative space. The tax result depends on how those areas are used and whether they are integral to the qualified production activity.
The IRS also provides a de minimis rule: if 95% or more of the physical space of a property satisfies the integral part requirement when placed in service, the taxpayer may elect to treat the entire property as satisfying that requirement.
Why cost segregation is central to QPP
QPP does not replace cost segregation. In many cases, it makes cost segregation even more valuable.
A cost segregation study traditionally identifies portions of a building that may be classified as shorter-life personal property, land improvements, or nonresidential real property. QPP adds another layer of analysis: determining which portion of the nonresidential real property is used as an integral part of qualified production activity and may be eligible for 100% expensing under Section 168(n).
IRS Notice 2026-16 specifically states that taxpayers may use reasonable methods to allocate basis between eligible and ineligible property. The notice lists square footage, cost segregation data, architectural or engineering plans, process diagrams, and construction invoices as methods that may be reasonable, depending on the facts. It also states that employee headcount or employee time spent on QPA activities is not a reasonable method for allocating basis.
That language is highly important. It places engineering-based cost segregation directly in the middle of the QPP documentation process.
How QPP and bonus depreciation can work together
QPP focuses on certain qualifying real property used in production. Traditional cost segregation may identify personal property or land improvements that are not QPP but may still qualify for other accelerated depreciation benefits, including bonus depreciation when applicable.
That means the best result may come from a coordinated depreciation strategy, not a single analysis. A facility study should help distinguish:
- Qualifying QPP real property
- Shorter-life personal property
- Land improvements
- Nonqualified real property
- Office, administrative, sales, parking, research, engineering, software development, lodging, or finished-goods storage areas
- Dual-use or shared infrastructure
- Capitalized improvements serving production areas
This is especially important for manufacturers and production businesses investing in major expansions, modernization projects, or new facilities.
Capitalized improvements may qualify
The QPP opportunity is not limited to entirely new buildings. IRS Notice 2026-16 includes examples involving capitalized improvements to existing facilities, including an electrical system upgrade to a factory used in qualified production activity. In the example, the upgrade was treated as a separate unit of property but could be analyzed by reference to the integrated production facility for purposes of the integral part requirement.
This opens planning opportunities for companies modernizing existing production facilities, upgrading electrical or mechanical systems, expanding production capacity, or making other capital improvements that support qualified production activity.
Ownership and leasing structures matter
QPP eligibility can become more complex when the real estate is owned by one entity and used by another. As a general rule, property used by a lessee in a qualified production activity is not treated as being used by the lessor in a qualified production activity. However, IRS Notice 2026-16 provides exceptions for certain consolidated group arrangements and commonly controlled pass-through structures.
This is an important issue for manufacturers that hold real estate in a separate entity. Before assuming QPP applies, taxpayers should review ownership, leasing, related-party structure, and control rules with their tax advisor.
Recapture risk should be part of the planning
The QPP benefit is powerful, but it comes with a 10-year change-in-use recapture rule. If, during the 10-year period after the QPP is placed in service, the property ceases to be used as an integral part of a qualified production activity and is used in another productive use, Section 1245 ordinary income recapture may apply.
IRS Notice 2026-16 includes an example where a company claims a $10 million QPP deduction and later changes the use of the facility. The change in use causes ordinary income recapture under the guidance.
This does not mean taxpayers should avoid QPP. It means the election should be intentional. Businesses should consider expected facility use, potential future sale or lease changes, partial elections, and long-term operational plans.
A practical QPP study process
A strong QPP analysis should generally include:
- A review of the taxpayer’s production activity
- A review of facility ownership and use
- A construction and placed-in-service timeline
- A review of architectural plans, engineering drawings, and process flows
- A cost segregation analysis
- Identification of qualifying and nonqualifying areas
- Basis allocation between eligible and ineligible property
- Coordination with bonus depreciation and other MACRS classifications
- Documentation to support the tax advisor’s QPP election
- A discussion of partial election and recapture considerations
The goal is not simply to maximize the deduction. The goal is to maximize the deduction in a way that is supportable, well documented, and aligned with the taxpayer’s facts.
Why this opportunity requires action now
QPP is time-sensitive. Construction must begin within the statutory window, and the property must be placed in service within the applicable placed-in-service window. For businesses planning new facilities, expansions, acquisitions, or improvements, the QPP analysis should happen early, not after the project is complete.
Early planning can help taxpayers preserve documentation, track eligible and ineligible costs, align invoices and construction records, and avoid missing important support needed for the election.
Final takeaway
Qualified Production Property may create a significant first-year tax deduction for qualifying production facilities. But the benefit depends on much more than owning a manufacturing building. Taxpayers need to evaluate the activity, facility use, basis allocation, construction timing, election strategy, and long-term change-in-use risk.
For manufacturers, producers, refiners, and agricultural businesses, the best approach is to coordinate QPP with an engineering-based cost segregation study. That combination can help identify the full depreciation opportunity, separate eligible and ineligible property, and create the documentation needed to support the position.
- IRS Notice 2026-16: https://www.irs.gov/pub/irs-drop/n-26-16.pdf
- IRS One Big Beautiful Bill provisions page: https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions
