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Ext. PublicationThe Tax Navigator – Notice 2026‑16: Qualified Production Property and Bonus Depreciation Rules
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Join Sean Muller, The Tax Navigator, as he breaks down IRS Notice 2026‑16 and its impact on taxpayers investing in qualified production property. In this episode, Sean explains how the proposed regulations allow full bonus depreciation for qualifying facilities, define production and manufacturing requirements and highlights key limitations, including recapture rules and integrated‑facility considerations.
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Detailed Description of The Tax Navigator – Notice 2026‑16: Qualified Production Property and Bonus Depreciation Rules
00:00:00
Sean: We want to spend some extra time talking about Notice 2026-16, which deals with qualified production property. It came out of the OBBBA, and it allows taxpayers to write off an entire facility, including the nonresidential real property that’s traditionally a 39-year asset, and write it all off as bonus depreciation when placed in service.
00:00:22
Sean: The whole point of the provision was put into law to bring manufacturing back to the U.S., a big part of the President’s plan.
And so, we were questioning because it just had the reg section, what all the rules were going to be — questions about what was going to happen.
00:00:37
Sean: This notice provides proposed regulations that we’re expecting comments on over the next couple of months. Big highlights of the deal: It defines what production, refining and manufacturing is. Production only applies to agriculture and chemicals, and then manufacturing is traditional manufacturing. You have to make significant modifications to the product in order to qualify. And that’s how you get to the definition there.
00:01:05
Sean: It has to be acquired after July 4, or started construction after January 19, 2025. But it works from ’25 until ’29 — you can put this facility in place. The downside if you write off the facility is that if it used changes in the next 10 years, you have to recapture all the deductions you’ve taken.
00:01:31
Sean: So, this 39-year depreciation that you’ve taken all as bonus depreciation gets completely recaptured if you shut down the facility permanently. You can shut down the facility for repairs with the intent of bringing it back online and not trip up the recapture.
00:01:46
Sean: But if you stop the manufacturing line and it just sits there mothballed, you will have to recapture all that as ordinary income. A provision on that was what to do with the related parties.
00:01:56
Sean: So, let’s just say Company A builds the facility and then they lease it to Company B. There was concern about what would work there because lessors can’t take the bonus depreciation.
00:02:07
Sean: But they did come up with some safe harbors. If it’s part of a consolidated group or it’s part of a commonly controlled partnership or S corporation, you can take the bonus depreciation. There are some tests as well about: Is it an integrated facility?
00:02:21
Sean: So, you’ve got Facility A and B that’s already been old and cold operating. You build a new facility to supplement your manufacturing process. You can write off Building C if it’s a separate asset, even though it’s part of an integrated part of the production process.
00:02:39
Sean: One caveat there is it has to be part of the integrated facility and the production facility. It cannot be just a warehouse to hold finished goods. If it’s a warehouse to hold finished goods, it does not qualify. So, you can actually have the raw materials stored there that go into your manufacturing process — that’s okay.
00:02:57
Sean: The other carve-out you have there is for office and leasing equipment — basically your admin function — there is a safe harbor that if 95% or greater of your facility is actually qualified production and is not office admin, you can take 100% of the facility. So, there is a 95% safe harbor.
00:03:17
Sean: One thing that’s interesting in the proposed regulations is that your engineering space counts as office and admin. So, if you’ve got an engineering group that’s part of the warehouse that’s going through and developing new products, that is actually excluded from the production process.
00:03:31
Sean: So, something to think about there as well. That’s about it on this notice. It’s good stuff and bad stuff. But it is going to be beneficial for you to write off the entire property.
00:03:43
Sean: Another option though is to avoid these rules entirely and just get a cost segregation study, write off the majority of the property inside and then just depreciate the walls, etc., over 39 years.
And then you don’t have to worry about that recapture in 10 years.
This episode of The Tax Navigator was recorded prior to publication. Some references or updates discussed may reflect information current as of the recording date.
