The New Qualified Production Property Deduction Under §168(n)

Holden Moss CPAs  |  February 2026

Expect Different Results

For decades, if you built a factory, a refinery, or a production facility, you had to depreciate the building over 39 years. The One Big Beautiful Bill Act, signed July 4, 2025, just changed that — and the IRS has now issued detailed guidance on how to claim it.

 

The new provision, §168(n) of the Internal Revenue Code, creates the Qualified Production Property (QPP) deduction: a 100% first-year write-off for qualifying nonresidential production buildings placed in service after July 4, 2025. IRS Notice 2026-16 (February 2026) provides the interim rules taxpayers can rely on now.

 

⚡ The Core Benefit A company that spends $40 million building a new U.S. production facility can deduct the entire $40 million in year one — rather than roughly $1 million per year for 39 years. The present-value difference is enormous.

 

First, a Word About “Manufacturing” vs. “Production”

Here is where many taxpayers will underestimate whether they qualify. The word “manufacturing” conjures images of heavy industry — steel mills, auto assembly lines, chemical plants. If that is your mental picture, you may talk yourself out of the deduction before you even ask the question. That would be a mistake.

The legal definition of manufacturing in Notice 2026-16 is deliberately industry-neutral. It means materially changing the form or function of tangible personal property to create a new item held for sale, rent, or lease — where the inputs are transformed so they are distinguishable from and cannot readily be returned to their original state.

The test is simply: do inputs go in, and does something fundamentally different come out? If yes, it is manufacturing — regardless of what industry you are in.

 

Here is what that looks like in practice:

 

🍞  Bakery Flour, eggs, butter → bread. That is manufacturing.	🪙  Sawmill Raw logs → dimensional lumber. That is manufacturing.
🍷  Winery Grapes → bottled wine. That is manufacturing.	🪑  Furniture Maker Rough wood → finished tables and chairs. That is manufacturing.
🧵  Textile Mill Raw fiber → fabric. That is manufacturing.	🍺  Craft Brewer / Bottler Raw ingredients → packaged beverages. That is manufacturing.
💊  Pharma / Chemical Organic or inorganic materials → new substance. Chemical production.	🌽  Wet Corn Miller / Refiner Purifying raw materials into higher-value products. Refining.

 

None of those look like a traditional factory — but all of them qualify under the notice’s broad, functional definition.

 

💡 The Semantics: A Counterintuitive Twist In everyday speech, “production” sounds broader than “manufacturing.” Under §168(n), it is actually the reverse. Manufacturing has no industry qualifier — it covers virtually any tangible transformation. Production is the narrower term, limited specifically to agricultural production and chemical production. The word that sounds more expansive is actually the more restricted one.

 

The one real limiting principle: the transformation must be material. Packaging, repackaging, labeling, and minor assembly alone do not qualify. But if you are genuinely converting inputs into something that could not readily be returned to its original form, you likely clear the bar.

 

What Types of Activities Qualify?

Notice 2026-16 defines three qualifying activity categories:

 

🏭  Manufacturing

Materially changing the form or function of tangible personal property to create a new item for sale or lease. See the examples above. This is the broadest category and the one most taxpayers will fall under.

⛅  Refining

Purifying a substance into a higher-value product. The notice lists 13 specific examples, including petroleum processing, wet corn milling, processing cane or beet sugar, recovering nonferrous metals from scrap, extracting alumina from bauxite ore, and processing liquefied natural gas.

🌿  Agricultural & Chemical Production

Agricultural production covers cultivating crops and raising qualifying livestock (cattle, hogs, poultry, sheep, goats, fur-bearing animals, and others specifically listed). Chemical production covers forming a new substance from organic or inorganic raw materials — pharmaceuticals, fertilizers, synthetic resins, soaps, detergents, and similar products.

 

Check Your NAICS Code — It May Save You

For property placed in service between July 4 and December 31, 2025, there is a practical shortcut. If the principal business activity NAICS code on your most recently filed Federal tax return falls within the following sectors, your activity is automatically treated as qualifying — provided substantial transformation still occurs:

 

31 Manufacturing

32 Manufacturing

33 Manufacturing

111 Crop Production

112 Animal Production

 

⚠️ Check Your NAICS Code for Accuracy Now An outdated or imprecise code could forfeit the safe harbor unnecessarily — or create exposure if the wrong code appeared in prior years. Review what is on file before relying on this shortcut.

 

QPP vs. Bonus Depreciation: You Have to Choose

For brand-new buildings, QPP is the only game in town — regular §168(k) bonus depreciation has never applied to nonresidential real property generally. But for improvements to existing production facilities (electrical upgrades, capitalized maintenance, structural additions), there can be genuine overlap: the same improvement may qualify as both qualified improvement property (eligible for §168(k) bonus depreciation) and as QPP.

When both apply, you must pick one. Both produce a 100% first-year deduction. The differences that matter are in the fine print:

 

Factor	§168(k) Bonus Depreciation	§168(n) QPP
First-year deduction	100%	100%
Property type	Primarily personal property & QIP	Nonresidential real property only
Recapture exposure	Lower — standard §1245 rules	Elevated — full 10-year window
Election revocability	More flexible	Essentially irrevocable
Lessor eligibility	Generally available	Restricted (exceptions apply)

 

The bottom line: for improvements on a facility you are confident will remain in production use for a decade or more, QPP and bonus depreciation are economically equivalent. Where there is any realistic chance of a sale, repurposing, or change in use within 10 years, the more flexible §168(k) path is worth considering carefully.

 

⚠️ The QPP Election Is Essentially a One-Way Door Once made, the QPP election cannot be revoked without a private letter ruling and IRS consent — available only in “extraordinary circumstances.” The IRS has specifically said it will not grant consent when the purpose is to use hindsight. Get the analysis right before you file.

 

The Recapture Trap: A 10-Year Clock Starts Ticking

The most significant string attached to the QPP deduction is the recapture rule. If a property ceases to be used in a qualified production activity at any point within 10 years of being placed in service, the full amount of the QPP deduction is recaptured as ordinary income under §1245.

The notice illustrates this starkly: a taxpayer who took a $10 million QPP deduction and converted the facility to another use five years later must recognize $10 million of ordinary income in the year of conversion — all at once, all as ordinary income. There is no capital gains treatment and no installment sale relief for the recapture itself.

Recapture does not apply if the taxpayer moves seamlessly from one qualified production activity to another, or if the property is temporarily shut down for maintenance or upgrades with the intent to resume production. It is a change in the fundamental use of the property that triggers the clock, not a temporary pause.

 

The Hidden Limit: Excess Business Losses

Here is a trap that catches many pass-through owners off guard. Even if the QPP deduction is fully valid, it may not produce the expected tax savings in year one — at least not for individual taxpayers.

The excess business loss (EBL) limitation under §461(l) caps the aggregate business losses a non-corporate taxpayer can deduct in a single year. For 2025, that threshold is approximately $305,000 (single filers) or $610,000 (joint filers), indexed for inflation. Any losses beyond those thresholds are disallowed for the year and converted into a net operating loss (NOL) carryforward — usable in future years at only 80% of taxable income under §172.

Consider what this means for a partner in a manufacturing partnership that takes a $15 million QPP deduction. That deduction flows through to the individual partners. If a partner’s share creates business losses well above the §461(l) threshold, only a fraction is currently deductible. The rest becomes a multi-year NOL carryforward — stretching what looked like a year-one windfall into a deduction absorbed gradually over several years.

 

• C corporations are not affected — §461(l) applies only to non-corporate taxpayers, so C corporations can use the full QPP deduction without this restriction (though separate NOL rules may still apply in loss years)
• Basis and at-risk rules also apply — partners and S corporation shareholders must have sufficient tax basis and at-risk amounts; amounts in excess of basis or at-risk are suspended under §§704(d), 1366(d), or 465
• Model before you elect — for pass-through owners, the QPP deduction is not necessarily the immediate windfall it first appears; the interplay of §461(l), the 80% NOL cap, and basis rules means the benefit may be spread over multiple years

 

🚧 Planning Caution for Pass-Through Owners Before making the irrevocable QPP election on a large facility, model the §461(l) and NOL interaction carefully. The deduction may be fully valid but partially deferred — which affects the present-value analysis and the decision of whether QPP or an alternative depreciation strategy better fits the taxpayer’s overall picture.

 

A Few More Things Worth Knowing

• Not all parts of a building qualify. Offices, parking, sales areas, finished goods storage, R&D, and software development space must be carved out. A de minimis rule lets you treat the whole building as eligible if 95% or more of the space qualifies.
• Raw material storage qualifies; finished goods storage does not. The line between the two matters, particularly in integrated facilities.
• Construction must begin after January 19, 2025, and before January 1, 2029, and the property must be placed in service before January 1, 2031. The 5% physical work safe harbor can lock in the construction start date early.
• Used buildings can qualify under a special rule, if the building was not used in a qualified production activity between January 1, 2021, and May 12, 2025, and other requirements are met — an opportunity for buyers of shuttered manufacturing facilities.
• The QPP deduction is fully available for AMT purposes — eliminating one of the traditional concerns about accelerated depreciation for C corporations subject to the corporate AMT.
• IRS comments are due April 20, 2026. Submit via regulations.gov (search IRS-2026-0016) if you have questions about how the rules apply to your industry.

 

For a comprehensive practitioner’s guide with worked examples, election mechanics, recapture calculations, and the full QPP vs. bonus depreciation analysis, download our white paper: The New Qualified Production Property Deduction — A Guide to IRS Notice 2026-16.

 

Primary Authority: IRS Notice 2026-16; §168(n) of the Internal Revenue Code as added by §70307 of Public Law 119-21 (One Big Beautiful Bill Act, July 4, 2025).

This article is for informational purposes only and does not constitute legal or tax advice. Taxpayers should consult qualified tax counsel regarding their specific circumstances. © 2026 Holden Moss CPAs.