The IRS has released Notice 2026-16, providing interim guidance on the new 100% special depreciation allowance for Qualified Production Property (QPP) under IRC §168(n).
This is the first formal guidance implementing the production property incentive enacted under the One, Big, Beautiful Bill Act (OBBBA). The notice clarifies definitions, timing rules, allocation methods, and recapture mechanics.
Most importantly for structuring purposes:
The IRS explicitly permits common ownership structures to satisfy the “use by the taxpayer” requirement.
That clarification preserves the viability of typical real estate + operating company structures.
What the Law Does
Section 168(n) allows a 100% first-year depreciation deduction for certain nonresidential real property used in qualified production activities, provided strict construction and placed-in-service windows are met.
The incentive applies to:
- Nonresidential real property
- Used as an integral part of qualified production activity
- Construction beginning after January 19, 2025 and before January 1, 2029
- Placed in service before January 1, 2031
This is not equipment bonus depreciation. It is building-focused.
The Structural Risk Everyone Noticed
The statute requires that the property be used by the taxpayer as part of a qualified production activity.
On a literal reading, that created a major concern:
- Real estate LLC owns the building
- Operating company runs manufacturing
- Lease between related parties
Different legal entities.
Under a strict interpretation, that structure could have disqualified the deduction.
That would have eliminated most real-world manufacturing arrangements.
What the IRS Clarified
Notice 2026-16 confirms that the “use by the taxpayer” requirement can be satisfied in commonly controlled ownership structures.
In practical terms:
If the building-owning entity and the production entity are under common ownership or control, the use requirement can be met even if they are separate entities.
This is a significant clarification.
It preserves:
- Real estate holdco + opco models
- Related-party leases
- Tiered ownership groups
- Consolidated and commonly controlled structures
Without this clarification, the incentive would have been largely unusable in practice.
Other Key Highlights from the Notice
1. Narrow Definition of Eligible Property
Only nonresidential real property qualifies. Equipment and personal property do not fall under this provision.
2. “Integral Part” Requirement
Office space, administrative areas, parking, and non-production functions are excluded. Mixed-use facilities will require basis allocation.
3. Substantial Transformation Standard
Qualified production activity requires manufacturing, production, or refining resulting in substantial transformation. Assembly-only operations may face scrutiny.
4. 10-Year Recapture Rule
If the property ceases to be used in qualified production activity within 10 years, recapture applies under §1245 ordinary income rules.
This is not permanent, unconditional bonus depreciation.
Why the Common Ownership Clarification Matters
Most manufacturers operate using some version of:
- Real estate entity owns the building
- Operating company runs production
- Same or overlapping ownership
The IRS confirmation that common control can satisfy the use requirement:
- Aligns the incentive with commercial reality
- Prevents structural disqualification
- Keeps planning options intact
That is the headline development.
Planning Implications
Manufacturers and developers considering new production facilities should:
- Review ownership structures now.
- Confirm common control thresholds.
- Model basis allocations for mixed-use buildings.
- Evaluate recapture risk in exit planning.
- Document construction start and placed-in-service dates carefully.
The window is finite. Construction must begin before 2029.
Bottom Line
Notice 2026-16 provides critical interim clarity on the new 100% production property deduction.
The most important takeaway:
Common ownership structures are explicitly permitted.
That clarification keeps this incentive workable for real-world manufacturing groups.
Further regulations are expected, but taxpayers may rely on this notice until formal proposed regulations are issued.
Disclaimer
This article is for informational purposes only and does not constitute tax advice. Taxpayers should consult their tax professional regarding their specific facts and circumstances.
