The federal government does not often hand manufacturers and industrial operators a straightforward income tax win. Notice 2026-16, released by Treasury and the IRS on February 20, 2026, is one of those rare moments. It provides the first detailed guidance on a new 100% special depreciation allowance for “qualified production property” (QPP), a provision added to the tax code by the One Big Beautiful Bill Act. If your company manufactures goods, refines products, or conducts chemical or agricultural production in a building placed into service after July 4, 2025, this provision deserves your full attention.

What Is Qualified Production Property?

At its core, qualified production property is nonresidential real property that is used as an integral part of a “qualified production activity.” Think factory floors, processing facilities, refining structures, and similar production buildings. The law defines a qualified production activity as manufacturing, chemical production, agricultural production, or refining that results in the substantial transformation of raw materials into a finished product. In plain terms, if your facility is turning raw inputs into finished goods in a meaningful, physical way, your building may qualify.

There are important date windows to keep in mind. Construction of the property must begin after January 19, 2025, and before January 1, 2029. The property must be placed in service after July 4, 2025, and before January 1, 2031. Those are the guardrails, and they matter a great deal for capital planning purposes.

Breaking Down the 100% Deduction

Under standard tax rules, commercial real property is depreciated over 39 years. For companies already using cost segregation studies to accelerate depreciation on personal property and land improvements, this provision operates on a similar principle but applies it to the building structure itself. When a taxpayer makes an election under Section 168(n), they can deduct 100% of the unadjusted depreciable basis of the qualifying portion of the building in the very year it is placed into service.

For a $20 million production facility, that means it could result in a $20 million deduction in year one instead of roughly $513,000 per year spread over nearly four decades. That is an enormous acceleration of tax savings and a meaningful improvement to cash flow.

It’s important to note that this is not a credit, it’s a deduction. The practical impact depends on your effective tax rate, but for most industrial operators, a 100% first-year deduction at a 21% corporate rate translates directly into real dollars recovered much sooner than they otherwise would be.

Who Qualifies and What the Guidance Clarifies

Notice 2026-16 does the important work of defining the edges of this provision. A few things stand out for our industrial and energy clients:

  • The guidance specifies what space within a facility can qualify. If 95% or more of the physical space in a building is used for production activity, the entire building qualifies. If only a portion is used for production, only that portion qualifies. Space used for storing raw materials qualifies for QPP, while space used for storage of finished goods does not.
  • The notice also clarifies what doesn’t qualify. Importantly, the law explicitly excludes space used for offices, administrative functions, lodging, parking, sales, research, software development, or engineering activities. A cost segregation study can help owners navigate these complexities and separate out what qualifies from what doesn’t.  At KEA, our engineering-backed analysis takes the guesswork out of that process. We build a well-documented, accurate report so you can feel confident you’ve maximized the benefit.
  • There’s a special rule for certain used property. Companies that acquire a building that was not previously used in a qualified production activity between January 1, 2021 and May 12, 2025, may still qualify under the provision if the acquisition was made after January 19, 2025, and the property was not previously used by the acquiring taxpayer. This creates an opportunity for companies purchasing older industrial real estate and repurposing it for production. Additionally, improvements or additions to existing property may qualify, if requirements are met.
  • The election is not automatically revocable. When making the QPP election on your timely filed return, you must identify each property and qualified cost. You can also elect to take the allowance on only a portion of qualified cost. Once you make the election, the IRS requires extraordinary circumstances to allow a reversal. That means getting your documentation, space allocations, and production activity characterization right the first time is critical.
  • There’s a notable exception for lessors and lessees. If the lessee is in the same consolidated group as the lessor, or if the two entities share common control, the lessor can still qualify for QPP. This is good news for companies that have structured their organization with separate real estate and operating entities. 
  • The notice directly addresses contract manufacturing.  The IRS clarified that contract manufacturers may qualify for QPP, if the right requirements are met.

The Recapture Risk Is Real

There is one provision that every CFO and tax team should understand clearly before taking this deduction. If the property stops being used as an integral part of a qualified production activity at any point during the 10 years following its placed-in-service date, Section 1245 recapture applies. The IRS treats the property as having been disposed of at that moment, and the full amount of the deduction previously taken is recognized as ordinary income. That is a significant cliff. It means companies need to be confident in the long-term use plan for any facility before making the QPP election.

Sectors That Should Be Taking Action

The industries that stand to benefit most from this provision are those already in the middle of capital-intensive facility expansions. That includes refining and petrochemical operations, gas processing facilities, chemical producers, food and agricultural processors, advanced manufacturing facilities, and industrial operators building new domestic capacity. If your company has broken ground on a new production building after January 19, 2025, or is planning to do so before January 1, 2029, the QPP provision is worth modeling into your capital expenditure planning immediately.

Comments on Notice 2026-16 are due within 60 days of issuance, and proposed regulations will follow. Until those regulations are issued, taxpayers can rely on the interim guidance in the notice. The clock on construction start dates is already running, reach out to our team for support navigating this new guidance to ensure it’s done right.