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IRS Issues Guidance On Qualified Production Property
By Phil Jelsma, Partner & Chair of the Tax Practice Group
SAN DIEGO (March 31, 2026) – The IRS recently issued Notice 2026-16, its first formal guidance on Qualified Production Property (QPP) – nonresidential real property that is an integral part of a qualified production activity (QPA), including manufacturing, production, or refining that results in the substantial transformation of property within the United States. The Notice confirms that QPP is eligible for a special depreciation deduction mirroring bonus depreciation, allowing taxpayers to deduct 100% of the property’s tax basis if placed in service after July 4, 2025.
To qualify as QPP, construction must begin after January 19, 2025, and before January 1, 2029, with the property placed in service after July 4, 2025, and before January 1, 2031.
Used property may also qualify if acquired within the same timeframe and if it has not been previously used by the taxpayer, was not used in a QPA between January 1, 2021 and May 12, 2025, and is not acquired from a related party.
QPP excludes property used for offices, lodging, parking, sales, research, software development, engineering, or other non-production functions, as well as storage of finished goods.
The Notice imposes full recapture if, within 10 years, the property ceases to be used in a QPA. Taxpayers may use reasonable allocation methods, such as square footage or cost segregation, but not employee-based metrics. A de minimis rule allows full qualification if at least 95% of space is used for QPA.
Manufacturing is broadly defined as materially transforming property, while packaging alone does not qualify. Ancillary, on-site activities directly tied to production may be included.
CGS3 partner Phil Jelsma, chair of our tax practice group, recently discussed this IRS guidance – which provides important clarity on QPP and QPA, including eligibility, allocation, and recapture rules – in an article published in The Los Angeles Daily Journal and The Daily Transcript (both subscriber only).
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