New QPP Guidance Could Unlock Tax Deductions for Manufacturers

Manufacturers and producers planning facility expansions or new construction projects have an opportunity to accelerate tax deductions under the new QPP rules.

Created under the One Big Beautiful Bill Act (OBBBA), Section 168(n) allows taxpayers to elect a 100% depreciation deduction for certain manufacturing and production facilities placed in service before Jan. 1, 2031, provided construction began after Jan. 19, 2025, and before Jan. 1, 2029. IRS Notice 2026-16 provides additional guidance on how the rules work and which types of property might qualify.

While the rules are technical, the potential benefit is straightforward: qualifying companies could deduct eligible building costs much faster than under traditional depreciation rules.

For manufacturers managing capital intensive projects, that accelerated deduction could improve cash flow and create opportunities to reinvest in operations, equipment, or expansion initiatives.

Which facilities could qualify?

The deduction generally applies to portions of nonresidential real property used directly in qualifying production activities.

Examples of potentially qualifying activities include:

• Manufacturing finished goods
• Refining materials into higher-value products
• Certain agricultural or chemical production activities

The guidance focuses heavily on whether the activity substantially transforms raw materials or components into a different product.

For example, a manufacturing floor where products are assembled or processed could qualify, while administrative offices, showrooms, parking areas, and software development space generally would not.

That distinction is important because many facilities include a mix of qualifying and nonqualifying uses.

Why facility analysis matters

One of the more significant planning opportunities in the guidance involves identifying which parts of a facility qualify.

Notice 2026-16 allows taxpayers to use reasonable methods to allocate building costs between qualifying and nonqualifying areas. Acceptable approaches can include:

• Square footage studies
• Construction records
• Engineering plans
• Cost segregation analyses

For many manufacturers, this means the analysis goes beyond simply asking whether a building is a “manufacturing facility.” The more important question could be how much of the building is directly tied to production activities.

The guidance also includes a favorable de minimis rule: If at least 95% of a property is used for qualifying production activities, the entire property could qualify for the deduction.

That rule could simplify qualification for facilities with only limited office or administrative space.

Leased facilities might still qualify

The statute generally prevents lessors from claiming the deduction when property is leased to another business. However, Notice 2026-16 provides exceptions for certain related-party structures.

This clarification could be important for manufacturers that separate real estate ownership from operating entities.

In some cases, related-party lease arrangements within consolidated groups or commonly controlled entities still might allow the deduction if the operating business performs qualifying production activities.

Because ownership structures vary significantly among manufacturers, these rules likely will require careful review before claiming the deduction.

Existing facilities also could present opportunities

Although the rules generally favor new construction and original use property, the notice includes an exception that could allow certain previously used facilities to qualify.

In some situations, industrial property that was not previously used for qualifying production activities during a specified time frame still could be eligible after acquisition and conversion to manufacturing use.

This provision could create planning opportunities for companies purchasing or redeveloping existing industrial properties rather than building entirely new facilities.

Election and recapture considerations

The QPP deduction is not automatic. Taxpayers must make an election on a timely filed federal income tax return for the year the property is placed in service.

The election also requires supporting information about the property, eligible basis, and allocation methodology.

Companies also should be aware that recapture rules apply if the property stops being used in qualifying production activities within 10 years after being placed in service.

As a result, taxpayers should consider not only current facility use but also longer-term operational plans before making the election.

Why companies should evaluate projects now

Although regulations are expected in the coming months, Notice 2026-16 provides enough guidance for many taxpayers to begin evaluating projects already underway or in planning stages.

Manufacturers and producers considering any of the following might benefit from reviewing whether portions of those investments could qualify for accelerated deductions under Section 168(n):

• Facility expansions
• New plant construction
• Production line redesigns
• Industrial property acquisitions

Because qualification depends heavily on facility use, documentation, and ownership structure, early planning could help companies identify opportunities and reduce implementation challenges later in the process.