For decades, manufacturers generally recovered the cost of nonresidential production buildings over a long depreciation period rather than deducting the full cost in the year the property was placed in service. A new provision under the One Big Beautiful Bill Act (OBBBA) may significantly change that calculation for qualifying production property.
Under a new provision of the One Big Beautiful Bill Act — Section 168(n), covering “Qualified Production Property” (QPP) — eligible taxpayers can elect a 100% special depreciation allowance for the adjusted basis of qualifying production property in the year it is placed in service.
The IRS issued interim guidance on how these rules work in Notice 2026-16, released February 20, 2026.
What Changed: Key Timeline & Rules
What Actually Qualifies
The 100% deduction does not automatically apply to every part of a manufacturing facility. Qualified production property generally includes the portion of eligible nonresidential real property that is used as an integral part of a qualified production activity. This can include areas directly supporting manufacturing or production operations.
However, areas used for other purposes—such as offices, research activities, or storage of finished goods—may not qualify. When a facility has mixed uses, the eligible and noneligible portions may need to be identified and allocated separately.
The $15M Allocation Scenario: Suppose a manufacturer constructs a $20 million facility, but $15 million represents qualifying depreciable basis eligible for QPP treatment. If all requirements are satisfied, the manufacturer may be able to claim a special depreciation allowance of up to 100% of that $15 million eligible basis in the year the property is placed in service.
At a hypothetical 25% effective tax rate, that deduction could represent up to $3.75 million in federal tax savings, assuming the taxpayer has sufficient taxable income and otherwise qualifies.
It’s Not Just New Construction
QPP treatment may also apply to certain previously used industrial property that meets specific acquisition and prior-use requirements. Manufacturers renovating qualifying industrial space should review these requirements before assuming the property qualifies.
The new QPP rules can significantly change the tax economics of major manufacturing investments. Businesses planning new facilities or evaluating qualifying industrial properties should review the opportunity before the construction-start deadline in 2029.
The Election Requirement
Taking QPP treatment isn’t automatic — it requires an affirmative election on the tax return. Missing that election, or misclassifying which portions of a facility qualify, is a costly mistake to catch after the fact rather than before filing.