Notice 2026-16 (the Notice) announces that the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) intend to issue proposed regulations addressing the 100% special depreciation allowance for qualified production property (QPP) under IRC Section 168(n), which was enacted under the "One Big Beautiful Bill Act" (OBBBA). The Notice indicates that Treasury and IRS expect the forthcoming proposed regulations to be consistent with the interim guidance provided in Sections 3 through 8 of the Notice.

The Notice offers welcome clarity to taxpayers by defining key terms relevant to the QPP eligibility requirements, such as qualified production activity (QPA), manufacturing, production, refining, and substantial transformation; it also provides safe harbors and de minimis rules for determining whether certain QPP eligibility requirements are satisfied, such as the beginning-of-construction requirement and the integral-part requirement. The interim guidance offers flexibility for taxpayers by allowing the use of any reasonable method for allocating basis between eligible QPP and ineligible property, and by allowing taxpayers to make the IRC Section 168(n) election on a property-by-property basis for any portion of QPP. On certain occasions (e.g., original use, beginning of construction), the interim guidance directs taxpayers to familiar rules in the bonus depreciation regulations under IRC Section 168(k).

Background

IRC Section 168(n) allows taxpayers to elect a special 100% depreciation allowance for QPP, which is defined in the statute as the portion of any nonresidential real property that meets the following requirements:

• The property is depreciable under IRC Section 168
• The taxpayer uses the property as an integral part of a QPA
• The taxpayer places the property in service in the United States or any possession of the United States
• The original use of the property commences with the taxpayer
• Construction of the property begins after January 19, 2025, and before January 1, 2029
• The taxpayer elects to treat the property (or any portion thereof) as QPP
• The taxpayer places the property in service after July 4, 2025 (the enactment date) and before January 1, 2031
• The property is not depreciated (or required to be depreciated) under the alternative depreciation system (ADS) under IRC Section 168(g).

QPP does not include any portion of the nonresidential real property used for offices, lodging, administrative services, sales activities, research activities, software development or engineering activities, parking, or other functions unrelated to manufacturing, production, or refining of tangible personal property.

IRC Section 168(n)(2)(D) defines a QPA as the manufacturing, production (limited to agricultural and chemical production), or refining of a qualified product. However, a taxpayer's activities do not constitute manufacturing, production, or refining of a qualified product unless they result in a "substantial transformation" of the property comprising the product. Under IRC Section 168(n)(2)(F), a "qualified product" means any tangible personal property that is not a food or beverage that is prepared in the same building as a retail establishment in which such property is sold.

An election to apply the 100% special depreciation allowance for QPP is irrevocable (except in "extraordinary circumstances"). Further, lessors generally cannot qualify for the 100% special depreciation allowance, even if the lessee uses the property in a QPA.

Finally, QPP is treated as IRC Section 1245 property and certain recapture rules apply if the taxpayer stops using the property in a QPA during the 10-year recapture period, which begins on the date any QPP is placed in service.

Notice 2026-16

Qualified production property (QPP)

The Notice defines QPP as property, or a portion thereof, that is nonresidential real property and:

• Is Modified Accelerated Cost Recovery System (MACRS) property, as defined in Treas. Reg. Section 1.168(b)-1(a)(2) (i.e., tangible depreciable property subject to IRC Section 168)
• Is used by a taxpayer as an integral part of a QPA (as defined in Section 5 of the Notice) (the integral-part requirement)
• Is placed in service (as defined by Treas. Reg. Section 1.167(a)-11(e)(1)) within the United States or a territory of the United States (American Samoa, Guam, the Northern Mariana Islands, the Virgin Islands, and the Commonwealth of Puerto Rico) as defined by IRC Sections 7701(a)(9) and 7701(d), respectively
• Has its original use commence with the taxpayer as determined by Treas. Reg. Section 1.168(k)-2(b)(3)(ii)(A) through (C) (the original-use requirement)
• Has its construction begin after January 19, 2025, and before January 1, 2029, as determined by Treas. Reg. Section 1.168(k)-2(b)(5)(iv)(B) (i.e., physical-work test), including the safe harbor provided in Tres. Reg. Section 1.168(k)-2(b)(5)(iv)(B)(2) (i.e., the 10% cost safe harbor) (the construction-begins requirement)
• Is designated by the taxpayer as QPP in an election made in the time and manner provided in Section 7 of the Notice (property-by-property election for any dollar amount)
• Is placed in service after July 4, 2025, and before January 1, 2031 (unless the taxpayer receives an automatic one-year extension due to the property's location in a Federally declared disaster area) (the placed-in-service requirement)
• Is not property to which the ADS under IRC Section 168(g) applies
• Is not ineligible property described in Section 4.07 of the Notice (e.g., offices, parking, etc.)

Integral-part requirement

The Notice provides that property, or a portion thereof, is used as an integral part of a QPA (and thus satisfies the integral-part requirement) if a QPA (defined in Section 5 of the Notice and discussed later) is conducted in, or takes place within, all or a portion of the property's physical space. If the QPA is conducted in only a portion of the property's physical space, only that portion would satisfy the integral-part requirement. Each unit of property (defined in Section 4.03(1) of the Notice and discussed later), or a portion thereof, must satisfy the integral-part requirement on its own. That is, multiple units of property (e.g., multiple buildings) cannot be combined to satisfy the integral-part requirement. An exception exists, however, for multiple units of property that compose an "integrated facility" (discussed later).

If 95% or more of a property's physical space satisfies the integral-part requirement at the time it is placed in service, a taxpayer-favorable de minimis rule permits the taxpayer to elect to treat the entire property as meeting the integral-part requirement by including a declaration in the applicable election statement.

Leased property

Generally, property leased by a taxpayer (as lessor) to a lessee will not meet the definition of QPP for the lessor, even if the lessee utilizes the property in a QPA. Section 4.02 of the Notice (for consolidated groups and for commonly controlled passthrough entities), however, includes two exceptions to this general rule.

• Controlled-group exception: If a member of a consolidated group owns and leases property to another member of the group, the lessor member is not treated as a lessor. Instead, the consolidated group is treated as one taxpayer for purposes of the integral-part requirement.
• Exception for commonly controlled passthrough entity: If a partnership or S corporation (lessor passthrough entity) or an individual leases property to a commonly controlled person (generally 50% or more ownership), the lessor passthrough entity or lessor individual is not treated as a lessor of the property for purposes of satisfying the integral-part requirement. Rather, whether the property meets the integral-part requirement is determined by reference to the commonly controlled person's trade-or-business activities conducted within the leased property.

Original-use requirement

For purposes of determining whether property satisfies the original-use requirement, the Notice directs taxpayers to existing rules in Treas. Reg. Section 1.168(k)-2(b)(3)(ii)(A) through (C). Thus, the term "original use" means the first use to which the property is put by any person, whether or not that use corresponds to the taxpayer's use of the property.

Taxpayers paying or incurring additional capital expenditures to recondition or rebuild property they acquired or owned satisfy the original-use requirement to the extent of the expenditures they paid or incurred. A taxpayer's cost to acquire property that is then reconditioned or rebuilt, however, does not satisfy the original-use requirement. Property containing used parts will not be treated as reconditioned or rebuilt if the cost of the used parts is not more than 20% of the total cost of the property (i.e., such property is considered original-use property).

Beginning-of-construction requirement

For purposes of determining whether property satisfies the beginning-of-construction requirement, a taxpayer applies rules consistent with Treas. Reg. Section 1.168(k)-2(b)(5)(iv)(B), including the safe harbor in Treas. Reg. Section 1.168(k)-2(b)(5)(iv)(B)(2). Thus, whether construction has begun for this purpose is a facts-and-circumstances analysis that depends upon when the "physical work of a significant nature begins." Physical work does not include preliminary activities such as planning or designing, securing financing, exploring, researching, clearing a site, or test drilling to determine soil condition. Examples of physical work of a significant nature include excavation for footings, pouring concrete pads or the driving of foundation pilings into the ground.

A safe harbor provides that physical work of a significant nature will be considered to have begun at the time the taxpayer incurs (for an accrual-basis taxpayer) or pays (for a cash-basis taxpayer) more than 10% of the total cost of the property, excluding the cost of any land and preliminary activities such as planning or designing, securing financing, exploring or researching. When property is manufactured, constructed or produced for the taxpayer by another person, the taxpayer must satisfy this safe-harbor test.

Unit-of-property determination

As noted previously, except for units of property that compose an integrated facility, each unit of property (or a portion thereof) must satisfy the integral-part requirement on its own. In general, each building, including its structural components, is considered a single unit of property. However, an improvement or addition made to an asset after its placement in service is considered a separate unit of property.

For purposes of satisfying the integral-part requirement, a special rule is provided for integrated facilities. Specifically, multiple units of property that operate as an integrated facility (as evidenced by their actual operation) and are physically located or co-located on the same piece or contiguous pieces of land may be treated as a single unit of property for purposes of applying the integral-part requirement. For this purpose, a unit of property that is comprised solely of ineligible property (defined in Section 4.07 of the Notice and discussed later) - for example, an office building - may not be treated as part of an integrated facility even though it is physically located or co-located on the same piece of land as the rest of the integrated facility.

• EY observes: Although taxpayers may welcome the special rule for an "integrated facility," additional questions remain. Specifically, the Notice does not specify the type of "evidence" a taxpayer will need to support an "integrated-facility" determination based on the facility's actual operation. The Notice also does not clarify whether parcels or tracts of land will be considered contiguous if they possess common boundaries and would be one contiguous property but for the interposition of a road, street, railroad, public utility, stream or similar divider. It remains to be seen whether the forthcoming proposed regulations will include any exceptions for certain property (e.g., wastewater treatment plant) that is not located or co-located at the facility but is integral to its operation and connected (e.g., via pipeline) to the facility. A similar exception exists for an "advanced manufacturing facility" under IRC Section 48D.

Property not previously used in a QPA

The special depreciation allowance under IRC Section 168(n) is not strictly limited to brand-new facilities. For used property acquired after January 19, 2025, and before January 1, 2029, the original-use requirement and beginning-of-construction requirement are treated as met if:

• The property was not used in a QPA (determined without regard to whether the activity resulted in a substantial transformation of the property comprising a qualified product) by any person at any time during the period beginning on January 1, 2021, and ending on May 12, 2025
• The taxpayer did not use the property at any time preceding its acquisition (see five-year rule later)
• The acquisition of the property meets the requirements of IRC Section 179(d)(2)(A), (B), and (C), and Treas. Reg. Sections 1.179-4(c)(1)(ii), (iii), and (iv) or 1.179-4(c)(2) (i.e., the property is acquired via purchase and is not acquired from a related party or by a member of a controlled group from another member of the same group)
• The acquisition of the property meets the requirements of IRC Section 179(d)(3) and Treas. Reg. Section 1.179-4(d) (i.e., the taxpayer's basis in the property is not determined by reference to its basis in the hands of the transferor)

In determining whether property was not used by the taxpayer at any time before its acquisition, taxpayers must apply rules consistent with the used-property acquisition requirements in Treas. Reg. Sections 1.168(k)-2(b)(3)(iii)(B), 1.168(k)-2(b)(3)(iv)(D)(1)(i), and 1.1502-68(b). For example, only the five calendar years immediately preceding the current calendar year in which the taxpayer places the property in service (and the portion of that year before the property's placed-in-service date) are taken into account to determine if the taxpayer had a depreciable interest in the property at any time before the acquisition. Whether property is acquired after January 19, 2025, and before January 1, 2029, is determined by reference to Treas Reg. Section 1.168(k)-2(b)(5) (written-binding-contract provisions).

Ineligible property

Ineligible property includes any portion of property used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other functions unrelated to a QPA. Any portion of property used to store finished products and certain other items is not considered to be used as an integral part of a QPA and is ineligible property. Ineligible property also includes any property (or a portion thereof) that contains a manufacturing, production, or refining activity, or any other activity, that is not within the scope of the QPA definition in Section 5.01 of the Notice. For example, a property that exclusively contains activities described in Section 5.01(3) of the Notice is ineligible property (e.g., manufacturing-oversight activities, material/vendor selection, developing product design, etc.).

Allocation of basis

Taxpayers may use any reasonable method to allocate a property's unadjusted depreciable basis between eligible QPP and ineligible property. The Notice states that the use of square footage, cost-segregation data, architectural or engineering plans, process diagrams or construction invoices to allocate unadjusted depreciable basis to eligible property may be a reasonable method. The use of either employee headcount or employee time spent on QPA activities, however, is explicitly identified as a method that is not reasonable to allocate unadjusted depreciable basis to eligible property. More than one reasonable allocation method may be used if using a single allocation method would not properly allocate unadjusted depreciable basis between eligible and ineligible property; each allocation method, however, must be applied consistently and reflect the property's facts and circumstances.

For property containing dual-use infrastructure that serves both eligible property and ineligible property (such as a central air-conditioning system or a sprinkler system), taxpayers may use any reasonable method (as long as it takes into account the actual or planned usage of the dual-use infrastructure) to allocate the basis of such property between eligible and ineligible property. Examples of reasonable methods highlighted in the Notice include the use of architectural or engineering plans, blueprints, process diagrams, product specifications or a combination thereof.

EY observes: The Notice does not explicitly clarify how (or whether) taxpayers allocate unadjusted depreciable basis between eligible and ineligible property where the same physical space within the building is used for both a QPA (e.g., manufacturing with substantial transformation) and for ineligible property (e.g. research activities). For example, it is not uncommon for a taxpayer to use a manufacturing area for research activities (e.g., pre-pilot production lines and prototyping). Further guidance on this issue would be welcome to limit controversy.

Automatic extension of place-in-service date

Property that is located in a disaster area as defined by IRC Section 165(i)(5)(B) at any time during 2030 will be granted an automatic one-year extension of the placed-in-service-date requirement. For affected property, the requirement to be placed in service before January 1, 2031, is automatically extended to January 1, 2032. Taxpayers that apply the automatic extension of the placed-in-service-date requirement must include a declaration to that effect on the election statement required under Section 7 of the Notice.

QPA

QPA is defined as the manufacturing, production, or refining of a qualified product. A taxpayer's trade-or-business activity must result in a substantial transformation (defined later) of the property comprising the qualified product to constitute manufacturing, production or refining. In a taxpayer-friendly turn, manufacturing, production or refining activities, or related activities, that do not themselves substantially transform the property comprising a qualified product (for example, a subprocess such as preparing or breaking down raw materials for further manufacturing) may still be considered a QPA (or will not cause a taxpayer to fail to have a QPA), if the activities constitute "essential activities" or "related activities" (described in Section 5.02 and 5.03 of the Notice, respectively).

A manufacturing, production, or refining activity is essential to the completion of a QPA if:

• The activity occurs within the same property, or within the same integrated facility in which the substantial transformation of the property comprising the qualified product occurs
• The activity does not occur within ineligible property (e.g., offices and other property types described in Section 4.07(1)) of the Notice, and
• Without the activity, the substantial transformation of the property comprising the qualified product:
• Cannot occur
• Would result in an end product that differs in quality from the intended qualified product or
• Would result in a quantity of qualified product that differs from the intended quantity

The receiving and storage of raw materials or other inputs used or consumed during a QPA are activities that are deemed to be essential to the QPA if they are conducted in or take place within the same property or integrated facility; the storage of finished product, however, is not considered an essential activity.

A taxpayer's trade-or-business activity will not fail to be a QPA if the individuals performing or supervising the manufacturing, production or refining activities also perform activities related to the QPA if (i) the related activity occurs within the same property or integrated facility in which the substantial transformation of the qualified product occurs; and (ii) the related activity does not occur within ineligible property. The Notice provides a list of examples of activities that may be related to a QPA such as, oversight and direction of qualified activities, material and vendor selection, and management of QPA costs or capacities, among others.

EY observes: In welcome news for contract manufacturers, whether the taxpayer is the tax owner of the qualified product resulting from the QPA is not taken into account to determine whether the taxpayer's trade-or-business activity is a QPA. Therefore, a trade-or-business activity conducted by a taxpayer via a contract manufacturing arrangement under which the taxpayer does not own the final product still may constitute a QPA if it otherwise meets the requirements.

Manufacturing, production, and refining

Critical to the definition of a QPA are the definitions of "manufacturing," "production," and "refining." The Notice defines each of these terms.

The term "manufacturing" means to materially change the form or function of tangible personal property, including parts and components, to create a new item of tangible personal property that is held for rent, lease, or sale to customers in the ordinary course of a trade or business. The form or function of inputs is considered to be materially changed if, at the completion of the processes giving rise to the new item of tangible personal property, the materials, elements, parts, components or other inputs have been transformed such that they are distinguishable from, and cannot readily be returned to, their original state. A change in form or function resulting solely from packaging, repackaging, labeling, minor assembly operations, or a combination thereof, is not considered a material change to the form or function of tangible personal property. The Notice does not define these exclusions, so it is currently unclear (for example) what the term "minor assembly" encompasses.

The term "production" means either agricultural production or chemical production. The term "agricultural production" means the process of cultivating the ground, typically in fields or large acreage, and includes (i) preparing the soil; (ii) planting seeds; (iii) raising, cultivating, irrigating and harvesting crops for sale, rent or lease to customers; and (iv) breeding, rearing, feeding and managing livestock (defined in Section 5.02(7)(c) of the Notice) for sale, rent or lease to customers. The term agricultural production does not include (i) raising animals that are not livestock; or (ii) activities that benefit persons engaged in agriculture when these activities are not agricultural production, such as food marketing.

The term "chemical production" means a chemical process whereby a product is formulated from organic and inorganic raw materials, including preparing raw materials for reaction, combining materials in a reactor to form a new substance, isolating the final product from byproducts, intermediates, and other substances, and purifying the final product. Numerous examples of chemical production (such as the manufacturing of industrial gas, plastics, adhesives, soaps and certain pharmaceutical products) are listed in Section 5.02(8) of the Notice.

The term "refining" means purifying a substance into a useful and higher-value product. Numerous examples of refining (such as processing petroleum and other products from crude oil and processing vegetable oils from plant material) are listed in Section 5.02(6) of the Notice.

Substantial transformation

The Notice defines the term "substantial transformation of the property comprising a qualified product" as "the further manufacturing, production, or refining of the constituent elements, raw materials, inputs, or subcomponents into a final, complete, and distinct item of property in the hands of the taxpayer that is fundamentally different from the original constituent elements, materials, inputs, or subcomponents."

Examples of substantial transformation of property comprising a qualified product include the conversion of (i) wood pulp to paper; (ii) steel rods to screws or bolts; and (iii) freshly caught fish to canned fished.

Examples of activities that do not result in a substantial transformation of the property comprising a qualified product include the grouping and packaging of multiple items for sale as single item, such as (i) gift baskets; (ii) subscription boxes; or (iii) bundled electronics.

Safe harbor for property placed in service in 2025

For property placed in service after July 4, 2025, and on or before December 31, 2025, a taxpayer's trade-or-business activity conducted in the property will be treated as a QPA if:

• The principal business activity code used on its most recent income tax return filed before February 19, 2026, is an applicable North American Industry Classification System (NAICS) code listed in the Notice, and
• The activity results in, or is otherwise essential to, the substantial transformation of the property comprising a qualified product (see sectors 31, 32 or 33, or under subsectors 111 or 112 for a list of applicable NAICS codes)

Time and manner of making an election

A taxpayer designates and elects to treat property as QPP by making an election by the due date, including extensions, of the taxpayer's original federal income tax return for the tax year in which the taxpayer places the eligible property in service. Taxpayers make a designation and an election by attaching a statement to their federal income tax return for the tax year in which the eligible property is placed in service. The designation and election are made separately by each person owning the eligible property (i.e., the agent for the consolidated group will make the election for each member).

Taxpayers have the flexibility to designate the dollar amount of eligible property they intend to treat as QPP on a property-by-property basis by either designating the entire unadjusted depreciable basis of eligible property as QPP or designating a specific dollar amount (that does not exceed the unadjusted depreciable basis of the eligible property) as QPP.

The election statement, entitled "STATEMENT PURSUANT TO SECTION 7 OF NOTICE 2026-16", must include the name and taxpayer identification number of the taxpayer making the election. For each property placed in service in the tax year for which the election is being made, the following information must also be included:

• The street address, city, state, zip code, and a description of the property
• The total unadjusted depreciable basis of the property
• The dollar amount of unadjusted depreciable basis allocable to the eligible property, if the eligible property is less than the entire property, and a description that identifies the eligible property
• The dollar amount of the unadjusted depreciable basis of eligible property the taxpayer is designating as QPP (or a statement that the taxpayer is designating the entire unadjusted depreciable basis of the eligible property as QPP)

Taxpayers applying the de minimis rule in Section 4.02(2) of the Notice (i.e., 95% or more of the physical space of a property satisfies the integral-part requirement) must also include a declaration stating that they are applying the de minimis rule and identification of each eligible property to which the de minimis rule is applied. Taxpayers using the automatic one-year extension of the place-in-service-date requirement (Section 4.11 of the Notice) must also include:

• A declaration that:
• They are using the automatic one-year extension of the placed-in-service-date requirement
• Each property was located in a disaster area for all or a portion of 2030
• Identification of each eligible property for which they are using the automatic one-year extension of the placed-in-service-date requirement and identification of the federally declared disaster that established the disaster area applicable to each eligible property

Any election and designation made under the Notice may only be revoked in extraordinary circumstances by requesting a private letter ruling and obtaining the written consent of the Secretary. If the request for revocation would allow a taxpayer to use hindsight, the extraordinary-circumstances standard is not met.

Depreciation recapture

If a "change in use" occurs at any time during the 10-year period beginning on the date that QPP is placed in service by the taxpayer, then the taxpayer must recapture the depreciation claimed. A "change in use" of QPP occurs during the 10-year period if, at any time within such period, the QPP (i) no longer satisfies the integral-part requirement; and (ii) is used in another productive use that results in the property constituting disqualified property. A change in use does not occur if a taxpayer ceases to use QPP as an integral part of one QPA and begins to use it as an integral part of another QPA, provided it was not used in another productive use resulting in the property constituting disqualified property in interim. If only a portion of QPP undergoes a change in use, the Notice's depreciation recapture provisions only apply to that portion of the QPP that underwent a change in use. Property that has been placed in service but is temporarily idle for a finite time does not cease to satisfy the integral-part requirement and has not undergone a QPP change in use.

Disqualified property is subject to the depreciation recapture provisions in IRC Section 1245(a)(1) and is treated as having been disposed on the date the property first had a QPP change in use. The excess of the recomputed basis of the disqualified property over the adjusted basis of the disqualified property is treated as ordinary income in the year of the change. The taxpayer's basis in disqualified property is increased by the gain recognized and is treated as a new separate asset that was placed in service on the first day of the year of change (taking into account the applicable depreciation convention).

Disqualified property is not eligible in the tax year of the change for bonus depreciation under IRC Section 168(k) (e.g., if a taxpayer made a QPP election for qualified improvement property that would otherwise be bonus eligible, the qualified improvement property is not eligible for bonus when it begins as a new separate asset following the change in use). In addition, disqualified property is not eligible in the year of change for the election under IRC Section 179 or the special depreciation allowances under IRC Sections 168(l) (i.e., special allowance for second-generation biofuel plant property) or (m) (i.e., special allowance for certain reuse and recycling property).

Applicability date and reliance

Forthcoming proposed regulations are expected to be consistent with the interim guidance in sections 3 through 8 of the Notice and apply to property (i) whose construction begins (or acquisition occurs) after January 19, 2025; and (ii) that is placed in service in a tax year beginning on or after the date the final IRC Section 168(n) regulations are published in the Federal Register.

Taxpayers may rely on the guidance in Sections 3 through 8 of the Notice for property (i) whose construction begins (or acquisition occurs) after January 19, 2025; and (ii) that is placed in service in a tax year beginning before the date the forthcoming proposed regulations are published in the Federal Register (or other published guidance is issued). Taxpayers may rely on the guidance in Sections 3 through 8 of the Notice, provided that they follow the guidance in its entirety for all QPP placed in service in those tax years, beginning with the first tax year in which they rely on that guidance.

Request for comments

Treasury and the IRS requested that taxpayers provide comments on the Notice by April 20, 2026. Commenters are encouraged to specify the issues for which additional guidance is needed in the forthcoming proposed regulations. In addition to general comments on the Notice, Treasury and the IRS requested comments on the following:

1. Examples of reasonable methods to allocate a property's basis between eligible property and ineligible property
2. Whether the definitions for manufacturing, chemical production, agricultural production and refining are representative of their respective industries
3. Whether the definitions, or the examples, in Section 5 of the Notice should be expanded to include additional activities or examples, and if so, which activities or examples
4. Whether other examples of activities that are, or are not, manufacturing, production, or refining that result in substantial transformation of property comprising a qualified product would be helpful to include in the forthcoming proposed regulations

Implications

Notice 2026-16 offers welcome interim guidance for taxpayers and practitioners that have been seeking rules on how to determine whether property is eligible for the 100% special depreciation allowance for QPP and how to properly make the QPP election. The Notice answers common taxpayer questions, such as clarifying whether property is used as an "integral part" of a QPA, defining what constitutes a QPA, and defining key terms such as "substantial transformation of the property comprising a qualified product," "manufacturing" and "ineligible property."

The Notice makes clear that taxpayers that are not building brand-new factories but are similarly investing in domestic manufacturing, production and refining also stand to benefit from the 100% special depreciation allowance to the extent that they acquire certain used property not previously used in a QPA or to the extent they make improvements/additions to certain existing facilities that otherwise meet the requirements in the guidance. Similarly, the Notice clarifies that certain lessors (in certain related-party leasing arrangements), as well as contract manufacturers, may be eligible for the 100% special depreciation allowance. The Notice also introduces taxpayer-favorable safe harbors and de minimis rules and offers taxpayers flexibility in determining how to allocate basis between eligible and ineligible property and in determining what portion of eligible property it wants to designate as QPP.

As taxpayers navigate significant capital investment decisions, it is imperative that they carefully consider the interim guidance to validate whether this significant cost-recovery benefit is available. They should also consider the likelihood that their future plans for the property could trigger depreciation recapture (e.g., due to a change in use).

As enacted in the statute, this domestic investment incentive (typically accelerating cost recovery from 39 years to one year) is only available during a short window (i.e., construction must begin before 2029, and the qualified property must be placed in service before 2031); therefore, taxpayers should consider acting quickly to capitalize on this potentially substantial cost-recovery benefit. Although the interim guidance provides more certainty for taxpayers considering large capital investments, some questions remain unanswered. Treasury and the IRS encourage taxpayers to provide comments (by April 20, 2026) specifying the issues for which additional guidance is needed. For example, specific areas where uncertainty continues to exist include the following:

• For purposes of determining whether a taxpayer has an "integrated facility," the Notice does not clarify whether parcels or tracts of land will be considered "contiguous" if they possess common boundaries and would be contiguous but for the interposition of a road, street, railroad, public utility, stream, or similar divider
• For purposes of determining how taxpayers should allocate unadjusted depreciable basis, the Notice does not clarify how to allocate between eligible and ineligible property where the same physical space within a building is used for both a QPA and for ineligible property (e.g., manufacturing and research take place in the same physical space)
• For purposes of determining a taxpayer's eligibility to utilize the IRC Section 168(n) election, the breadth of manufacturing, production or refining activity that results in a substantial transformation of the property comprising a qualified product remains a facts-and-circumstances-based determination that is subject to interpretation and, as such, will likely remain an area of controversy.