IRS QPP Guidance: What Manufacturers Need To Know

Last month, the IRS released guidance on a substantial expanded tax benefit for companies looking to expand their manufacturing footprint.

The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, provides for a 100% depreciation deduction for qualified production property (QPP), which is generally U.S.-based manufacturing facilities constructed between 2025 and 2029 and placed in service before 2031. The IRS issued Notice 2026-16 to provide specifics on the deduction, including exceptions to a statutory rule that bars the deduction for leased property.

A Brief Review of the 100% QPP Deduction

In general, building construction, renovation, or expansion costs can’t be deducted in the year they’re incurred. Rather, they must be capitalized and depreciated over a 39-year period. The new tax provision allows a 100% depreciation deduction of eligible costs in the year QPP is placed in service – a major acceleration of depreciation deductions.

QPP is nonresidential real estate that meets the following requirements:

• It is used by the taxpayer (not a lessee of the taxpayer) as an integral part of a qualified production activity (defined later).
• It is located in the United States (including U.S. territories).
• Its original use started with the taxpayer (meaning it wasn’t acquired from a third party).
• Its construction began after January 19, 2025, and before January 1, 2029.
• It is placed in service before January 1, 2031.
• It is elected to be treated as QPP.

In general, a qualified production activity (“QPA”) is the manufacturing, production (agricultural or chemical only), or refining of a tangible item.  

There are a variety of conditions and exceptions applicable in determining QPA. For example, the tangible item must be “substantially transformed” during the production process. Also, a QPA excludes food or beverages prepared in the same retail location where they’re sold.

IRS Notice 2026-16: New Exceptions and Clarification on Elections

Notice 2016-16 carves out a few exceptions to the QPP rules and clarifies the availability of a partial QPP election. 

Exception for De Minimis Non-QPP 

The law clearly states that QPP applies only to the portion of a nonresidential building that is used in a qualified production activity. In other words, a clerical office, parking lot, or warehouse connected to the manufacturing facility is not considered QPP and is therefore not eligible for the 100% depreciation deduction.  

Notice 2026-16 provides an exception to the rule: If at least 95% of the facility is QPP when it’s placed in service, then the 100% depreciation deduction can apply to the entire facility. 

Exception for Leased Property 

As mentioned earlier, the law denies the 100% QPP deduction to taxpayers that lease the property to another party. Notice 2026-16 clarifies that a member of a consolidated group can still claim a QPP deduction if it leases the property to another member of the group. The exception allows a corporate group’s real estate holding company to own the QPP and lease it to the group’s operating company. 

Likewise, a pass-through entity or individual doesn’t have to forfeit the QPP deduction by leasing the property to a commonly controlled sole proprietorship, partnership, or corporation (defined as 50% or more ownership for the majority of the year and on the last day of the year).  

Clarification of Partial QPP Deductions 

The IRS clarified that a taxpayer can elect QPP treatment on a property-by-property basis. Taxpayers can also designate how much of their eligible costs to include in the 100% depreciation deduction; the remaining amount is deducted over a 39-year period. 

Insight: Although it sounds intuitive to claim a QPP deduction covering all eligible costs, it’s not always the most tax-efficient decision. For example, a taxpayer with $1 million in taxable income may not want to deduct $5 million in construction costs in the year placed in service. Doing so would create a $4 million net operating loss in the current year, which would have limitations placed on it in future years. As a result, taxpayers should consider multiple options beyond QPP to minimize their tax bills, including bonus, Section 179, and traditional depreciation. It’s important to consult an experienced tax advisor to determine the best course of action. 

Also, the new law includes a recapture provision for facilities that no longer meet the QPP requirements within 10 years of being placed in service, reversing the QPP deduction’s tax benefit. 

Insight: If it’s known that the facility may be sold or converted to a nonqualified use within a 10-year period, then it may be worth taking a partial QPP deduction. Again, a specialty tax professional can advise on the best way to structure a QPP election. ), Supplemental Information to Form 990 or 990-EZ, needs to be revised to accurately reflect the program service accomplishments during the reporting year.

Smith + Howard: Reading the Fine Print on QPP

The Smith + Howard Specialty Tax Services Team has studied up on the latest tax law and regulatory guidance to help manufacturers optimize their tax strategy and ensure compliance. To learn more about applying QPP to a planned or contemplated facility construction, renovation, or expansion, contact the Specialty Tax Services Team.

Contact an advisor to learn more about our services for nonprofits, including accounting, Form 990 preparation, compliance, and more.