The Rules, Until They Change Them
The IRS and Treasury released Notice 2026-16 on 20 February 2026, providing interim guidance on the special depreciation allowance for qualified production property (QPP) under the One, Big, Beautiful Bill. Taxpayers may rely on it until proposed regulations drop. Comments are due within 60 days.
What Qualifies
Qualified production property is nonresidential real property used as an integral part of a qualified production activity. That means manufacturing, chemical production, agricultural production, or refining that results in substantial transformation of the product. Think factories, not warehouses.
The property must be placed in service after 4 July 2025 and before 1 January 2031. Construction needs to have begun after 19 January 2025. Residential property is excluded. If you use property for both qualifying and non-qualifying purposes, you allocate basis accordingly.
The Deduction
Elect to take up to 100% depreciation of the unadjusted depreciable basis in the year you place it in service. Make the election via a statement on your timely filed return. KPMG notes a $60 million factory example would be fully deductible in year one.
This replaces the standard MACRS schedule (39 years for nonresidential real property). Form 4562 has been updated to accommodate claims.
What Can Go Wrong
If property stops meeting QPP requirements, depreciation recapture rules apply. KPMG flags complexities around related-party leases, same-year disposals, and like-kind exchanges. The "substantial transformation" test may exclude assembly or light processing operations. Strict, but the notice allows "act of God" extensions in narrow circumstances.
What Practitioners Need
The notice covers definitions, calculation mechanics, election procedures, and recapture rules. It does not resolve every edge case. Treasury specifically requests comments on areas needing additional guidance, which suggests they know this is incomplete.
If you have clients with manufacturing facilities under construction, read Notice 2026-16. If you have opinions on how it should work, submit comments before the 60-day window closes. The IRS is listening, for now.