Building or Expanding a Plant? A New Tax Rule Could Let You Write Off the Entire Cost Up Front

If you’re planning to build or expand a production facility, a new tax provision may allow you to fully deduct the cost in the year it’s placed in service, rather than depreciating it over several decades. This temporary opportunity could significantly improve cash flow and change how you think about project timing and structure.

The IRS recently released interim guidance that begins to clarify how this rule works in practice.  Taxpayers considering new construction or facility upgrades should review their timelines and ownership structures now, because these rules can significantly affect how they design projects, structure real estate, and recover their costs.

Below is a more detailed breakdown of how the rules operate and what it takes to qualify.

The Internal Revenue Service has released interim guidance in Notice 2026-16 outlining a significant new tax incentive for domestic producers.  This incentive stems from the One Big Beautiful Bill Act, enacted on July 4, 2025, which includes a temporary provision that allows for a special depreciation allowance in which manufacturers, agricultural producers, and chemical processors may elect to take a 100 percent depreciation deduction for Qualified Production Property (“QPP”) in the year such QPP is placed in service.

What Property Qualifies for the 100% Deduction?

QPP is defined as non-residential real property that meets the following requirements:

• The QPP is MACRS property to which Section168(g) does not apply;
• It is used as an integral part of a Qualified Production Activity. (“integral part requirement”);
• It is placed in service in the United States or a United States Territory;
• Its original use commences with the taxpayer. (“original use requirement”);
• Its construction (or acquisition subject to special conditions) begins after January 19, 2025, and before January 1, 2029. (“beginning of construction requirement”);
• It is placed in service after July 4, 2025, and before January 1, 2031. (“placed-in-service-date requirement”); AND
• It is designated as QPP by the taxpayer when the election is made.

For the purposes of the integral part requirement, a Qualified Production Activity is defined as the manufacture, production, or refining of tangible personal property that results in substantial transformation of the property comprising the product.

The IRS recently released Notice 2026-16 on February 20, 2026. This Notice provided interim guidance on Section 168(n) as a precursor to the forthcoming Proposed Regulations. Some of the notable inclusions are enumerated below.

Relief for Related Party Lessors

Some taxpayers may choose to construct (or acquire) QPP and then lease the property to another individual or entity for use. Generally, under section 168(n) this would not satisfy the integral part requirement and would thus disqualify taxpayers from the special depreciation allowance. However, Notice 2026-16 provides an exception to this rule.

If a taxpayer corporation that is a member of a consolidated group leases QPP to another member of the group, then the consolidated group is treated as a single taxpayer, the lease relationship ignored, and the taxpayer corporation is considered to satisfy the integral part requirement of QPP.

Similarly, if an individual or pass-through entity leases QPP to a commonly controlled person, then the lessor-lessee relationship is ignored, and the individual or pass-through entity is considered to satisfy the integral part requirement. Note that to determine whether there is a commonly controlled person, the rules lean heavily on the attribution rules of Sections 267(b) and 707(b). Before relying on this lease exception, a careful attribution analysis is recommended.

De Minimis Carveout

There is an “exclusion of office space” found in Section 168(n). Simply put, the depreciation of any space in the QPP that is unrelated to a Qualified Production Activity should be excluded from the calculation of the special depreciation allowance.

Fortunately, Notice 2026-16 clarifies an exception to this general rule. The de minimis carveout provides that if 95 percent or more of the physical space satisfies the QPP integral part requirement, then taxpayers may treat the entire space as satisfying that requirement. This ensures that less substantive use of QPP space for non-QPP purposes does not penalize taxpayers.

Other Items

Other notable items from Notice 2026-16 include:

• Further clarification of what constitutes eligible and ineligible property for mixed-use purposes.
• Elaboration on the details of the depreciation recapture requirement. Generally, if a QPP change of use occurs within 10 years of the placed-in-service date, taxpayers will be subject to Section 1245 depreciation recapture at ordinary tax rates.
• Situation-specific rules. Such rules address property placed in service and disposed of in the same taxable year, like-kind exchanges, and involuntary conversions.
• The method of making the election and details to include in the election statement. The election statement is filed with the tax return in the year the QPP is placed in service.

Your Path Forward

Wilkins Miller can assist you with any Section 168(n) analysis or compliance as we await the Proposed Treasury Regulations. If you are interested in taking advantage of this temporary special depreciation allowance, or if you have questions about how Notice 2026-16 affects your organization, please contact your Wilkins Miller Advisor today.