Qualified production property is a new class of nonresidential real property that manufacturers can deduct in full in the year it is placed in service, rather than depreciating it over 39 years. Created by Section 168(n) of the Internal Revenue Code under the One Big Beautiful Bill Act, the provision lets a manufacturer elect a 100 percent depreciation allowance on the qualifying portion of a new factory building. To claim it, construction must begin after January 19, 2025 and before January 1, 2029, and the building must be placed in service before January 1, 2031. Office, administrative, parking, lodging, and research space are carved out, and a 10-year recapture rule applies if the property leaves qualified use.
This is a distinct benefit from equipment expensing. Machines, tooling, and fixtures already qualify for immediate deduction through bonus depreciation and Section 179. What Section 168(n) adds for the first time is the ability to expense the structure itself, which historically had to be recovered slowly over decades. For a manufacturer building or expanding a plant, that difference can be worth millions in accelerated deductions.
What Qualified Production Property Is Under Section 168(n)
Section 168(n) was added by Section 70307 of Public Law 119-21, enacted July 4, 2025. It defines qualified production property as the portion of any nonresidential real property that a taxpayer uses as an integral part of a qualified production activity, provided several conditions are met.
The property must be nonresidential real property, meaning the building shell and structural components rather than the machinery inside. Original use of the property must begin with the taxpayer, so this is aimed at newly constructed or newly expanded facilities rather than acquisitions of existing buildings that were already in service. The property must be located and placed in service in the United States or a U.S. territory.
A qualified production activity is the manufacturing, production, or refining of a qualified product that results in a substantial transformation of the property being processed. A qualified product is generally any tangible personal property. “Production” for this purpose is limited to agricultural and chemical production, and food or beverage prepared and sold on the premises is excluded. This targets true manufacturing, not warehousing, retail, or light assembly that does not substantially transform materials.
The practical effect is significant. A manufacturer that would otherwise recover a new plant over 39 years using straight-line depreciation can instead elect to deduct the qualifying basis in a single year. On a large capital project, that reshapes cash flow and the after-tax return on the investment.
Why This Is Different From Section 179 and Equipment Bonus Depreciation
Manufacturers already have powerful tools for expensing equipment. It is important not to confuse those with Section 168(n), because they apply to different categories of property and follow different rules.
Section 179 expensing and bonus depreciation apply to tangible personal property such as production machinery, material handling systems, and computer equipment. These have long allowed immediate or accelerated deductions for the contents of a facility. You can read more in our overview of Section 179 depreciation and our explanation of how 100 percent bonus depreciation returned.
What none of those provisions historically reached was the building itself. Nonresidential real property has been recovered over 39 years, so a manufacturer constructing a new plant could expense the equipment quickly but had to depreciate the walls, roof, foundation, and structural systems over nearly four decades. Section 168(n) closes that gap for a defined window by treating the qualifying portion of the structure as immediately deductible.
Because the two regimes overlap on a single construction project, coordination matters. Equipment and land improvements may flow through bonus depreciation or Section 179, while the qualifying building shell flows through Section 168(n), and nonqualifying areas remain on the standard 39-year schedule. A cost segregation study becomes the mechanism that sorts each dollar of project cost into the right bucket.
Timing: The Construction and Placed-in-Service Windows
Section 168(n) is a temporary provision with strict date tests, and missing a window can disqualify an entire project. Two separate timing requirements must both be satisfied.
First, construction of the property must begin after January 19, 2025 and before January 1, 2029. Projects that broke ground before January 20, 2025 do not qualify, which prevents the benefit from applying retroactively to plants already underway when the law was written.
Second, the property must be placed in service after July 4, 2025 and before January 1, 2031. Placed in service generally means the building is ready and available for its intended manufacturing use, not merely under construction. A facility that begins construction inside the window but is not operational until 2031 or later would fall outside the benefit.
The gap between the construction deadline and the placed-in-service deadline is deliberate. It gives large industrial projects that start near the end of 2028 roughly two additional years to reach completion. Manufacturers planning multi-year builds should map their schedules against both dates early, because construction sequencing decisions made today can determine eligibility.
What Is Excluded: Office, Administrative, and Other Nonproduction Space
Section 168(n) does not treat an entire building as qualified simply because manufacturing happens inside it. The statute carves out portions used for functions unrelated to production.
Excluded space includes areas used for offices, administrative services, lodging, parking, sales activities, research activities, and software development or engineering activities. Only the portion of the building that is integral to the manufacturing, production, or refining activity counts as qualified production property. On a modern advanced manufacturing facility, nonqualifying areas can represent a meaningful share of total square footage, so the carve-out is not a rounding error.
Taxpayers may use any reasonable method to allocate the building’s unadjusted depreciable basis between qualifying and nonqualifying portions, as long as the method is applied consistently and reflects the facts and circumstances. In practice this means the allocation must be defensible and documented, not estimated. Square footage, engineering studies, and construction cost records all feed into a supportable allocation, which is another reason a formal cost segregation analysis is central to claiming the deduction correctly. Our tax advisory services team works with manufacturers on exactly this kind of allocation.
The 10-Year Recapture Rule
The Section 168(n) deduction comes with a long tail of compliance risk that manufacturers must plan for. If qualified production property ceases to be used as an integral part of a qualified production activity within 10 years of being placed in service, the benefit can be recaptured as ordinary income.
Recapture is triggered when the property is converted to another use that is not a qualified production activity during that 10-year period. Because the deduction accelerated a large amount of depreciation into year one, recapture can produce a substantial income pickup in a later year if the plant is repurposed, sold into nonqualifying use, or its production line is shut down and the space redeployed.
Partial changes in use can trigger proportionate recapture based on the affected portion of the property. This makes ongoing use monitoring important throughout the decade following construction, not just in the year of the election. A manufacturer weighing this election should model not only the upfront tax benefit but also the likelihood that the facility stays in qualifying production use for the full 10 years.
IRS Interim Guidance: Notice 2026-16
On February 20, 2026, the Treasury Department and the IRS issued Notice 2026-16, providing interim guidance on the special depreciation allowance for qualified production property under Section 168(n). The provision itself was enacted in Public Law 119-21. The notice signals that proposed regulations will follow.
The guidance addresses definitions of qualified production property and qualified production activities, and it includes special rules for related-party leases, dual-use infrastructure, and the allocation of basis between qualifying and nonqualifying property. Taxpayers may rely on Notice 2026-16 until proposed regulations are issued. The IRS requested comments by April 20, 2026, while noting that later comments would still be considered if they do not delay the regulations.
Because this remains interim guidance, manufacturers claiming the deduction should document their positions carefully and revisit them as the rules are finalized. Pease Bell’s manufacturing practice is tracking the developing guidance so clients can act on current rules while staying positioned for the final regulations.
Frequently Asked Questions
What is qualified production property under Section 168(n)?
Qualified production property is the portion of new nonresidential real property that a manufacturer uses as an integral part of a qualified production activity, such as manufacturing, agricultural or chemical production, or refining that substantially transforms tangible personal property. Under Section 168(n), a taxpayer can elect to deduct 100 percent of the qualifying basis in the year the property is placed in service instead of depreciating it over 39 years.
How is this different from Section 179 and bonus depreciation?
Section 179 and bonus depreciation apply to tangible personal property like machinery and equipment inside a facility. Section 168(n) is the first provision to allow immediate expensing of the qualifying portion of the building structure itself, which was previously recoverable only over 39 years. The regimes are complementary and often apply to the same construction project.
What are the deadlines to qualify?
Construction must begin after January 19, 2025 and before January 1, 2029, and the property must be placed in service after July 4, 2025 and before January 1, 2031. Both tests must be satisfied for the property to qualify.
What parts of a factory do not qualify?
Areas used for offices, administrative services, lodging, parking, sales, research activities, and software development or engineering are excluded. Only the portion of the building integral to manufacturing, production, or refining counts, and taxpayers must allocate basis between qualifying and nonqualifying space using a reasonable, consistently applied method.
What is the 10-year recapture rule?
If qualified production property stops being used as an integral part of a qualified production activity within 10 years of being placed in service, the accelerated deduction can be recaptured as ordinary income. Partial changes in use can trigger proportionate recapture, so continued qualifying use must be monitored for the full decade.
Where can I find official guidance?
The provision was enacted in Public Law 119-21, and the IRS issued interim guidance in Notice 2026-16 on February 20, 2026. Taxpayers may rely on that notice until proposed regulations are released. A tax advisor experienced with manufacturing facilities can help you apply the rules to a specific project.
