💡 Just Call It an Asset Comeback: Businesses Can Pursue 100% Depreciation for Qualified Production Property

Back on October 22 of last year, we covered the basics of the 100 percent depreciation allowance for qualified production property (QPP) enacted under the One Big Beautiful Bill Act (OBBBA). At that time, Treasury and the IRS had yet to issue any administrative guidance, and we flagged that key questions—around beginning of construction, election mechanics, and recapture—were still waiting for answers.

That wait is over. On February 20, 2026, the IRS released Notice 2026-16, providing interim guidance taxpayers can rely on now, with formal proposed regulations to follow.

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The short answer: taxpayers needed workable rules. Section 70307 of the OBBBA² added § 168(n) to the Internal Revenue Code, but like most laws from Congress, it left some gaps that were wide open to confusion. Notice 2026-16 fills those gaps temporarily, until Treasury promulgates full regulations. The notice is explicit that taxpayers may rely on its guidance in the interim—a meaningful assurance for anyone moving forward with a qualifying project today. In other words, the “shovel-ready” projects.

If you read our October article, much of the foundational framework will look familiar. QPP is still nonresidential real property used as an integral part of a qualified production activity (QPA), and a QPA still requires a substantial transformation of property into a final, distinct product. Offices, administrative areas, parking, lodging, and software development remain excluded. The core timelines—beginning construction after January 19, 2025, and before January 1, 2029, and placed in service before January 1, 2031—are unchanged.

But Notice 2026-16 adds several critical layers of detail our October article could only anticipate:

Section 5.02(9) of the Notice¹ defines “substantial transformation” as further manufacturing, production, or refining of constituent elements or raw materials into a final, complete, and distinct item that is fundamentally different from those inputs. It is specifically tied to “qualified production activity.” To make this concrete, Section 5.04 offers a plain-language examples with facts and analysis of a factory-based multi-step tomato sauce production to clarify that the qualifying transformation occurs at the sauce processing and jarring stage—not during the earlier steps of inspecting and chopping ingredients. This bright-line example is intended to be a genuine planning tool for qualified production activity.

Conversely, an example where substantial transformation does not happen is the grouping and packaging of multiple finished goods for sale as a single item, such as gift baskets, subscription boxes, and bundled electronics.

We flagged in October that the IRS would need to develop guidance on beginning-of-construction standards. Rather than inventing a new framework, the Notice cross-references the bonus depreciation regulations under Treas. Reg. § 1.168(k)-2(b)(5)(iv)(B). That means the established physical work test and 10-percent safe harbor familiar from prior bonus depreciation practice apply here. Taxpayers and their advisors already know this terrain, which should ease compliance considerably.

Because QPP must exclude non-qualifying portions of a building (offices, break rooms, etc.), taxpayers normally need to allocate basis between eligible and ineligible square footage using a reasonable method. The Notice, however, gives a helpful out: if 95 percent or more of the physical space of a property satisfies the integral part requirement at the time it is placed in service, a taxpayer may elect to treat the entire property as qualifying. For businesses building purpose-built manufacturing facilities, this rule could simplify the analysis significantly.

Our October article noted the original-use requirement as a potential trap for buyers of existing property. The Notice addresses this directly. A taxpayer that acquires used property between January 19, 2025, and January 1, 2029, can qualify as the “original user”—and therefore meet the original-use requirement—if three conditions are met: the property was not used in a QPA by any person between January 1, 2021, and May 12, 2025; the acquiring taxpayer never previously used it; and the acquisition satisfies the related-party and cost-basis rules of IRC § 179(d). Subsequent improvements made by the new owner are treated as separate units of property and must independently qualify, but the integrated facilities rule allows physically connected, jointly operating improvements to satisfy the integral part requirement together.

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Notice 2026-16 also addresses what happens if QPP later stops being used in a qualified production activity. Depreciation recapture rules will apply. This is a planning reminder for businesses that might repurpose a facility down the road—the full deduction taken today could become taxable income if the property changes use.

For property located in a federally declared disaster area (as defined in IRC §165(i)(5)) at any time during 2030, the Notice provides an automatic one-year extension of the placed-in-service deadline—pushing it from January 1, 2031, to January 1, 2032. Taxpayers relying on this relief must include a specific declaration on their election statement.

Notice 2026-16 does not take anything away—it adds clarity. The guidance confirms that manufacturers, food processors, chemical producers, and agricultural refiners building new facilities in the U.S. have a workable, reliable framework to plan around right now.

As always, the details matter. Coordinate with your tax advisor to evaluate whether your specific project—its construction timeline, use of space, and acquisition structure—meets the requirements laid out in Notice 2026-16. And stay tuned: we will continue to follow this area as proposed regulations develop.

📣 If you want to be heard…SPEAK UP!

There’s plenty of time for interested parties to chime in on this. Treasury and IRS invite comments on a specifically limited scope of questions until April 20, 2026 at 11:59 PM Eastern Standard Time. Commentors are encouraged to use the Federal e-Rulemaking portal to submit comments online.  Use “IRS-2026-0016” in the search field. 

That’s the update, everyone! Thanks for taking the time to check out this edition of the weekly Tax Clarity Newsletter.

Thank you so much!

[1] Sec. 5.01, Notice 2026-16 (Feb. 20, 2026) – Interim Guidance on Special Depreciation Allowance for Qualified Production Property.

[2] IRC § 168(n), as added by § 70307 of Pub. L. 119-21, 139 Stat. 72 at 198 (2025).

[3] Treas. Reg. § 1.168(k)-2(b)(5)(iv)(B) (beginning of construction safe harbor, cross-referenced in Notice 2026-16, Section 4.05).

[4] IRS.gov Newsroom, “Treasury, IRS issue guidance on special depreciation allowance for qualified production property” (Feb. 20, 2026), accessed Feb. 23, 2026.

DISCLAIMER: The information in this newsletter is derived from public information, provided for education purposes. It is not provided as a financial advisory service and should not be relied upon as such. For advice on a specific tax matter, please consult a tax professional.