The One Big Beautiful Bill Act (OBBBA) introduced a powerful, yet highly structured, tax incentive aimed at accelerating investment in domestic manufacturing facilities. Internal Revenue Code Section 168(n) allows eligible taxpayers to claim a 100% special depreciation allowance for certain production related real property. This means companies building or expanding factories, processing plants or similar production facilities may be able to fully deduct the building cost immediately instead of depreciating it over the traditional timeframe of 39 years.
Newly released IRS Notice 2026‑16 gives business taxpayers the interim guidance to understand how to claim the deduction, and how the IRS will interpret the new law until formal regulations are issued. Specifically, the notice addresses evaluating eligibility, structuring facilities and making the required elections. While the opportunity is substantial, the rules make clear that facility design, space usage, ownership structure, and long‑term operational plans will ultimately determine how much of a project qualifies and whether deductions may later be subject to recapture.
Read “One Big Beautiful Bill Up Close: Bonus Depreciation for U.S. Manufacturing Facilities.”
The following activities do not qualify as qualified production activities (QPAs), even if located in the same building as qualifying operations:
The following activities do/may qualify as QPAs:
The notice additionally clarifies ownership of the finished product is not required. So, contract manufacturers may qualify even if they never take title to the product being produced.
The notice emphasizes that only the portion of a building used as an integral part of QPAs qualifies as Qualified Production Property (QPP). For mixed‑use facilities:
A de minimis exception applies where the entire building may be treated as qualifying when 95% or more of a building’s physical space is used for QPAs.
Multiple buildings operating together on contiguous land may also be treated as a single integrated facility, expanding eligibility for campus style operations to qualify as QPP.
Leased property is generally excluded, but the notice provides critical exceptions for consolidated groups and commonly controlled entities, allowing related parties to be analyzed together for qualification purposes. Common control generally requires 50% or more ownership, applying attribution rules under Sec. 267 and Sec. 707.
The definition of a qualified product excludes food and beverages prepared in the same building as a retail establishment in which they are sold. For food and beverage manufacturers, this creates planning considerations around facility separation, logistics and site design.
The QPP election must be made on a timely filed return (including extensions) and requires detailed property level disclosures. Once made, the election cannot be revoked without IRS consent, which is granted only in extraordinary circumstances, such as delays caused by federally declared disasters or acts of God.
QPP cannot be depreciated under the alternative depreciation system (ADS), meaning taxpayers that have made or are considering Sec. 163(j) real property trade or business elections must carefully evaluate potential disqualification.
Finally, the notice provides a detailed recapture framework. If property ceases to be used in a qualifying manner within 10 years, the disqualified portion is recaptured as ordinary income, and the remaining basis is treated as newly placed in service. Partial changes in use can trigger partial recapture, reinforcing the need for long‑term planning.
Sec. 168(n) creates a powerful but tightly controlled opportunity to fully expense QPP. For manufacturers willing to align facility design, operational realities and tax strategy, the benefit can materially improve project economics. At the same time, the rules demand intentional structuring, careful documentation and forward looking analysis to avoid unintended recapture or to qualify for the deduction in the first place.
Contact Krista Zuchowski, Harrison Higgins or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.