Key Takeaways
- Internal Revenue Service (IRS) guidance allows 100% expensing for qualified production property (QPP) used in U.S. production activities.
- Eligible projects must meet strict construction, placed-in-service and qualified-use deadlines under Internal Revenue Code Section 168(n).
- Businesses should assess Section 168(n) eligibility, documentation and 10-year recapture risk before claiming immediate expensing.
The U.S. Department of the Treasury and the IRS recently issued Notice 2026-16, providing interim guidance on new Internal Revenue Code Section 168(n), enacted as part of the One Big Beautiful Bill Act (OBBBA). The provision introduces a significant new tax incentive by allowing taxpayers to immediately deduct 100% of the cost of certain qualified production property (QPP) placed in service in the United States, rather than recovering those costs over the standard 39-year depreciation period.
Background
Section 168(n) was enacted to encourage domestic manufacturing, production, refining and agricultural investment by accelerating cost recovery for newly constructed production facilities. Prior to OBBBA, most nonresidential real property was depreciated over lengthy recovery periods, often delaying the tax benefits associated with large-scale capital investments. The new provision temporarily allows eligible taxpayers to fully expense qualifying facilities in the year the property is placed in service.
The IRS guidance clarifies eligibility requirements, definitions, election procedures and recapture considerations while Treasury works toward issuing proposed regulations.
Key Provisions
The guidance confirms that:
- Qualified production property generally includes newly constructed nonresidential real property used as an integral part of a qualified production activity in the United States
- Qualified production activities may include manufacturing, production, refining and certain agricultural or chemical processing activities involving a substantial transformation of tangible personal property
- 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
- Taxpayers may elect to apply Section 168(n) to all or part of an otherwise qualifying project
- The guidance also provides allocation rules for mixed-use facilities and clarifies treatment of related-party transactions and self-constructed property
- Taxpayers must make an affirmative election to apply Section 168(n) and the election is generally made on a timely filed original federal income tax return for the taxable year in which the qualified production property is placed in service. The election applies on a property-by-property basis, providing taxpayers with flexibility to selectively apply immediate expense depending on broader tax planning considerations, including taxable income, state conformity and future depreciation strategies.
Exceptions: Importantly, the notice includes exceptions for certain leasing structures involving consolidated groups and commonly controlled pass-through entities. Under these rules, a lessor may still qualify for Section 168(n) treatment if the leased property is used by a related operating entity in a qualifying production activity. For consolidated groups, the group is treated as a single taxpayer, allowing the integral-use requirement to be evaluated based on the lessee member’s production activities conducted within the property. Similarly, partnerships, S corporations and individuals leasing property to commonly controlled entities may qualify if common ownership thresholds are satisfied under Sections 267(b) or 707(b) and the property is used in the related party’s qualifying trade or business activities.
Planning Considerations
The new guidance creates substantial planning opportunities for businesses considering domestic expansion or facility investments. However, taxpayers should carefully evaluate eligibility requirements, documentation considerations and long-term operational plans. The rules include a 10-year recapture provision if the property ceases to be used in a qualifying production activity or is disposed of during the recapture period.
Bottom Line
Businesses planning significant capital expenditures should review current and future projects to determine whether Section 168(n) may provide enhanced tax benefits alongside existing depreciation incentives. Additional IRS guidance and proposed regulations are expected.
Contact Us
If you have questions about how these changes may affect your business or would like assistance evaluating depreciation planning opportunities, please contact your PKF O’Connor Davies client service team or:
Joe Petosa, MBA, EA
Director
jpetosa@pkfod.com | 203.323.2400
Darren Bushey, CPA
Partner
dbushey@pkfod.com | 203.705.4146
Brian M. Varley, CPA
Partner
bvarley@pkfod.com | 551.249.1121