The One Big Beautiful Bill Act (OBBBA) was passed on July 3, 2025. The bill contained several taxpayer-favorable changes that extended certain provisions that were set to expire, as well as created several new provisions. One of the most exciting provisions that was included in the OBBBA was the addition of a new class of property called Qualified Production Property (QPP) under §168(n). Under this provision, taxpayers are able to elect to immediately deduct 100% of the QPP depreciable basis placed in service during the year. While the legislation was exciting, in many cases, the newly drafted code section left taxpayers with more questions than answers.
On Feb. 20, 2026, the IRS issued IRS Notice 2026-16 to provide interim guidance to taxpayers looking to take advantage of this provision for their 2025 tax filings.
Qualified Production Property Defined
Qualified Production Property is an elective treatment defined as a portion of any nonresidential real property used by a taxpayer as an integral part of a qualified production activity within the United States or possession of the United States. In general, the property must:
- Be originally placed into service by the taxpayer.
- Construction on such property must begin after Jan. 19, 2025, and before Jan. 1, 2029.
- Placed into service after July 4, 2025, and before Jan. 1, 2031.
Furthermore, the code section placed certain restrictions that excluded certain spaces within the property, such as spaces used for offices, administrative services, research activities, software development, and even engineering activities.
Moreover, the definition provides that in the case where the taxpayer is a lessor, property used by a lessee cannot be considered used by the taxpayer(lessor) in a QPA.
Clarity & Interim Guidance
On Feb. 20, 2026, the IRS issued IRS Notice 2026-16 to provide interim guidance to taxpayers looking to take advantage of this provision for their 2025 tax filings until proposed regulations are issued.
The notice addressed several key concerns for taxpayers, including rules related to integral use, property used by a lessee, allocation of basis, and further clarification on what constitutes a Qualified Production Activity (QPA).
Integral Use
Property eligible for the QPP election must be considered integral to the QPA. Notice 2026-16 provided that each unit of property must satisfy the integral use requirement. For purposes of this code section, each building and its structural components are considered its own unit of property. In the case of an addition or improvement to an asset after it is first placed in service, that addition or improvement is its own unit of property. The notice also provided that in the case of multiple buildings that operate as an integrated facility, as evidenced by operations and physically located on the same or contiguous tract(s) of land, may be treated as a single unit of property.
Perhaps one of the biggest questions raised by taxpayers was related to the treatment of warehousing/storage space and loading bays. This question was also addressed in the guidance by providing that receiving and storage of raw materials or other input materials used or consumed in the QPA is considered essential if they are conducted in or take place within the same property or integrated facility. Storage of finished goods or other items was specifically excluded from the definition of essential activities.
For property that contains both eligible and ineligible property, the notice provided a De Minimis rule whereby if 95 percent or greater of the property is used in a QPA, then 100 percent of the unadjusted basis in the property is eligible for QPP treatment.
Property Used By A Lessee
The provision §168(n) that states a lessor could not treat property used by a lessee as used by the lessor in a QPA created confusion for certain taxpayers that had separate real estate holding and operating structures, as well as for consolidated groups with intercompany leases. The notice provided clarification in this regard by providing an exception for certain commonly controlled pass-through entities as well as consolidated groups that are treated as a single taxpayer.
Allocation Of Basis
Since only property used as an integral part of a QPA can be considered QPP and certain areas of a building were specifically excluded from QPP treatment, the notice also provided that the taxpayer may use “any reasonable” method to allocate the unadjusted depreciable basis between eligible and ineligible property. Examples of acceptable methods included cost segregation data, square footage allocation, engineering plans, and direct construction invoices.
Further, the notice provided that more than one reasonable method may be used if a single method did not properly allocate the unadjusted basis between the eligible and ineligible property. However, methods such as employee headcount or time spent on QPA were explicitly mentioned as not reasonable methods of allocation.
Qualified Production Activity Explained
A Qualified Production Activity (QPA) was also defined in the code section as the manufacturing, production, or refining of a qualified product (any tangible personal property if such property is not a food or beverage prepared in the same building in which it is sold). The QPA must result in “substantial transformation” of the raw material inputs.
The notice provided clarity for certain essential activities, stating that "a QPA includes any manufacturing, production, or refining activity that does not result in a substantial transformation of the property comprising a qualified product." The activity is essential to the completion of the QPA if:
- The activity occurs within the same property or integrated facility in which the substantial transformation occurs.
- The activity does not occur within ineligible property.
- And, without the activity:
- The substantial transformation cannot occur.
- It would result in an end quality that is different than intended.
- It would result in a quantity that is different from what was intended.
Other related activities, such as oversight of the QPA, material and vendor selection, control of the raw materials or work-in-process, or managerial duties related to the manufacturing, production, or refining activities that result in a substantial transformation, such as cost reduction or efficiency initiatives, may also qualify as QPA.
Conclusion
With the guidance issued in IRS Notice 2026-16, taxpayers finally have some guidance on how to potentially take advantage of this lucrative tax provision as part of the OBBBA. If you have constructed or are constructing property for use in Manufacturing, Production, or Refining, reach out to GBQ's real estate services team. We would be glad to help navigate the framework to claim this deduction.
