If a business builds a factory in the US, it used to write off that building very slowly. Nonresidential real property normally gets depreciated over 39 years, so a $10 million plant handed back only a thin slice of deduction each year. The One Big Beautiful Bill Act changed that. There is now a way to deduct the whole building in year one.
That is what qualified production property depreciation does, and for capital-heavy businesses it is one of the biggest tax incentives to come along in decades. Here is what it is, who it actually fits, the dates that decide everything, and the traps worth knowing before anyone files.
The One Big Beautiful Bill Act added a new rule, Section 168(n), to the tax code. It lets a business elect a 100% special depreciation allowance on qualified production property (QPP) in the year the property is placed in service. In plain terms, instead of spreading the deduction across decades, the owner claims the full cost up front.
So what is QPP? Roughly, it is the portion of nonresidential real property in the US that is used as an integral part of a qualified production activity. Picture the shell of a working plant, the part where things actually get made. The activity happening inside has to be real production, not storage or paperwork.
The appeal is simple. Turning a 39-year write-off into a single-year deduction is a huge swing in cash flow, which is exactly what Congress was going for when it wrote the rule to pull manufacturing back onto US soil.
This is the point people mix up most, because both give you 100%. Worth slowing down on.
Bonus depreciation under Section 168(k) is the one most owners already know. OBBBA made it permanent again at 100% for qualified property acquired and placed in service after January 19, 2025. But bonus depreciation mostly covers tangible personal property, equipment, machinery, and shorter-life assets. It never reached the building shell.
QPP under Section 168(n) is the new piece, and it does something bonus depreciation could not: it lets you expense the actual production building itself. So the two rules work side by side rather than competing. Equipment runs through 168(k), the factory structure runs through 168(n). A cost segregation study is still your friend here, since it sorts which components belong to which bucket.
This is where eligibility is quietly won or lost, so it is worth committing to memory.
To use the QPP deduction, construction has to begin after January 19, 2025, and before January 1, 2029. The property then has to be placed in service after July 4, 2025, and before January 1, 2031. Miss either window and the special depreciation allowance is simply gone.
There is also a used property path with its own tests. The property cannot have been used in a qualified production activity by anyone between January 1, 2021, and May 12, 2025, and cannot have been used by the taxpayer before they acquired it. Get those facts right and the original-use and construction-timing boxes are treated as checked.
QPP only works if the building supports a qualified production activity (QPA). The law names four: manufacturing, chemical production, agricultural production, and refining. Each one has to result in a substantial transformation of tangible personal property into a qualified product.
The IRS gave clean examples of what "substantial transformation" looks like, borrowed from existing rules: turning wood pulp into paper, steel rods into screws and bolts, or fresh tuna into canned tuna. Light repackaging or a small tweak to a finished good does not clear the bar.
There is a shortcut, too. If your main business activity code matches a manufacturing NAICS code (sectors 31 to 33) or crop and animal production (subsectors 111 and 112), and you meet the transformation test, your activity is treated as a QPA.
Now the exclusions, because this is where returns go sideways. QPP does not include any part of the building used for offices, administrative services, lodging, parking, sales activities, research, software development, or engineering. Most real plants mix qualifying and non-qualifying space, so you split the basis between the two using a reasonable method. One useful break sits in the interim guidance: a 95% de minimis rule, which means if at least 95% of the space is used in production, you can treat the whole building as qualifying.
Here is the part that keeps this from being free money. It is a long-term commitment.
If the property stops being used in a qualified production activity within 10 years of being placed in service, you have to recapture the benefit as ordinary income under rules similar to Section 1245. Sell the plant early, convert it to another use, or shut the line down, and a chunk of that big deduction comes right back. Treasury has also flagged anti-abuse rules aimed at related-party transfers and sale-leaseback arrangements, so this is not a set-and-forget election. It is also largely irrevocable, which is why the planning that happens before the property goes into service is the whole ballgame.
On February 20, 2026, the IRS and Treasury released Notice 2026-16, the first real guidance on how Section 168(n) works in practice. It spells out definitions, the election mechanics, mixed-use allocation, leasing rules, and recapture. Businesses can rely on that guidance in full until proposed regulations show up.
Those proposed regulations are still on the way as of now, and the IRS has said they will line up with the notice. So for anyone advising a manufacturing, refining, or agricultural client, Notice 2026-16 is the working rulebook today.
A practical move if a client has a plant in progress or on the drawing board: check the construction and in-service dates against those windows early, start a cost segregation study, and document the production use carefully from day one. The deduction is generous, but it clearly rewards the people who plan ahead rather than the ones who discover it at filing time.
1. What is qualified production property depreciation? It is a 100% first-year depreciation allowance under Section 168(n), created by the One Big Beautiful Bill Act. It lets a business fully deduct the cost of a qualifying US production building in the year it is placed in service, instead of over 39 years.
2. How is QPP different from bonus depreciation? Bonus depreciation under Section 168(k) covers equipment and other tangible personal property. QPP under Section 168(n) covers the nonresidential real property itself, meaning the production building. They apply to different assets and can be used together.
3. When does property have to be placed in service to qualify? After July 4, 2025, and before January 1, 2031. On top of that, construction has to begin after January 19, 2025, and before January 1, 2029.
4. What counts as a qualified production activity? Manufacturing, chemical production, agricultural production, or refining that results in a substantial transformation of tangible personal property into a qualified product. Offices, storage, sales, and research do not count on their own.
5. What parts of a building do not qualify? Space used for offices, administrative services, lodging, parking, sales, research, software development, or engineering. You allocate basis between the qualifying and non-qualifying portions using a reasonable method.
6. What is the 95% de minimis rule? Under Notice 2026-16, if at least 95% of a building's space is used in a qualified production activity, you can treat the entire building as qualifying rather than carving out small non-production areas.
7. What happens if the property stops being used for production? If it leaves qualified production use within 10 years of being placed in service, the deduction is recaptured as ordinary income under principles similar to Section 1245. Since the election is largely irrevocable, this is a real risk to model before you claim it.
8. Can businesses rely on the rules before final regulations? Yes. Taxpayers can rely on Notice 2026-16 until the IRS issues proposed regulations, which the agency has said will follow the same framework.
Qualified production property depreciation can move real money for the right business, but the eligibility, allocation, and recapture rules leave plenty of room for a costly mistake. If you or a client is weighing a QPP deduction, Madras Accountancy can help you run the numbers, handle the cost segregation work, and keep the documentation clean well before anything is placed in service.
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