IRS Expands Accelerated Depreciation Opportunities for Manufacturers

Published on February 27, 2026 by Lauren Huster in International Business, Tax Services

Article Summary

• Updated May 14 2026
• IRS Notice 2026-16 expands accelerated depreciation opportunities: Manufacturers may elect 100% depreciation on qualifying production facilities, significantly improving near-term cash flow.
• Used property may now qualify: Facilities acquired after January 19, 2025, can be eligible if they weren’t previously used in a Qualified Production Activity (QPA) or by the taxpayer (or a related party).
• Flexible space and allocation rules apply: A 95% de minimis rule allows most production-focused facilities to fully qualify.
• Integrated facilities and improvements may be eligible: Additions, improvements, and co-located properties operating as one integrated facility may qualify as separate units.
• Related party leasing arrangements may still qualify: The notice provides important exceptions for certain consolidated groups and commonly controlled entities.

NOTE: This post was updated with new information on May 14, 2026.

On February 20, 2026, the IRS released Notice 2026-16, providing additional guidance on the special depreciation allowance for Qualified Production Property (QPP). If you’d like a refresher on the initial impact of QPP, you can read our earlier blog here.

Overview

Generally, under IRC §168(n) and Notice 2026-16 a building (or portion of a building) that qualifies as QPP can elect 100% first year depreciation. Certain requirements must be met, including that a Qualified Production Activity (QPA) occurs within the building.

Section 168(n)

Section 168(n) allows manufacturers to elect 100% accelerated depreciation on facilities that meet specific requirements:

• Nonresidential property used by the taxpayer as an integral part of a Qualified Production Activity (QPA).
• Located in the U.S. or a U.S. territory.
• Construction began after January 19, 2025, and before January 1, 2029.
• Placed in service after July 4, 2025, and before January 1, 2031.

Without this election, these facilities would generally be depreciated over 39 years. With it, manufacturers can significantly accelerate deductions, improve cash flow, and create greater flexibility to reinvest in operations, equipment, and growth.

Key guidance from Notice 2026-16

The notice provides helpful clarification and, in some cases, expanded opportunity. Here are several notable takeaways:

• Used property may qualify: Property acquired after January 19, 2025, and before, January 1, 2029, can qualify if it wasn’t previously used in a QPA and wasn’t previously used by the taxpayer (or a related party).
• Production vs. nonproduction space must be segregated: However, a practical de minimis rule applies – if at least 95% of the physical space is used for a QPA, the entire space can qualify.
• Reasonable allocation methods are permitted: Taxpayers may allocate a property’s basis between eligible and ineligible portions using square footage, cost segregation studies, architectural or engineering plans, and similar methods. Employee headcount or time spent on QPA activities, however, can’t be used for allocation.
• Improvements and additions may qualify separately: Additions or improvements to an existing facility can potentially be treated as a separate unit of property, opening the door for those costs to qualify as QPP.
• Integrated facilities may be treated as one unit: If multiple properties operate together as an integrated facility and are physically co-located, they may be treated as a single unit. In some cases, this broader view can allow a facility to qualify when it otherwise might not.

Leasing

Prior to the notice, it was unclear whether the common structure of a holding company leasing property to an operating company would prevent the lessor from treating the building as QPP.

The notice clarified that if a taxpayer is a lessor to an unrelated party and the property is used in the lessee’s QPA, the lessor would be ineligible to classify the building as QPP since no QPA occurs for the lessor.

Related party exceptions

While an unrelated party relationship would disqualify the lessor, the notice provided some related party exceptions:

• Consolidated group exception: A consolidated group is treated as a single taxpayer. If one member owns the building and leases to another member, the building can qualify for QPP if the lessee has a QPA in the building.
• Commonly controlled exception: This allows for a lessor that is a flow through entity or individual to look at the lessee’s QPA in the building to see if the lessor qualifies for QPP if there is common control. This control is defined as 50% or more direct or attributed ownership.

Treating a building as QPP can provide a significant tax benefit by allowing taxpayers to immediately deduct the cost of a building rather than depreciating it over 39 years. It’s important to review ownership structures and future plans to help maximize available tax deductions.

Talk to us

Tariffs, production shifts, and evolving depreciation rules can feel like a lot to navigate. The good news? There may be meaningful opportunities to minimize your tax burden and maximize cash flow, if you know where to look.

Our team of top international tax pros brings practical insight and industry-specific experience to help manufacturers think strategically about what’s next. If you have questions about how these changes could impact your operations, contact us today to schedule a free consultation.

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